Tax relief and Consultation paper
Carlton Hood, customer director at Old Mutual Wealth, comments:
“A full consultation of the future of pensions tax relief is welcome. The Green paper on strengthening incentives to save is a once in a lifetime opportunity to develop a regime that helps return Britain to a nation of savers, not spenders. Pension contribution rates are the biggest factor in generating retirement income, therefore the consultation is arguably more significant than any of the reforms we have seen in the last year.”
“It is disappointing, however, that the Government has decided to pursue plans to curb pension tax relief for high earners. The Chancellor has raided the pension tax relief piggy bank to pay for a manifesto pledge but this persistent tinkering is not helpful for consumer confidence. The pension landscape has changed massively over the past year and further tweaks around the edges of legislation just puts people off pensions. This is contradictory to the impact the Government hopes to achieve with its Green paper on pensions tax relief. While these interim changes are not due to come into force until April 2016, it is imperative that savers, particularly high earners, continue to contribute as much as they can to their pension, rather than being put off by what they may see as more uncertainty in the pensions market.”
Pension Wise eligibility lowered to age 50+
From the budget statement: Over 85,000 people have taken advantage of the new flexibilities for accessing pensions that were introduced in April 2015. The government believes it is important that all consumers can access free, high quality guidance on their choices. Following the successful launch of Pension Wise in April 2015, the government is extending access to this free and impartial guidance service to those aged 50 and above, and is launching a comprehensive nationwide marketing campaign to further raise awareness of the service
Jon Greer, pensions technical specialist, Old Mutual Wealth, comments:
“New research* suggests that only 1% of people who are aware of the pension changes have spoken to Pension Wise as a result, so capacity is clearly not an issue. As far as guidance or advice surrounding your pension provision goes, it is never too early to start, so extending the age criteria for consulting Pension Wise is an excellent move. This could mean more people making informed choices, or at the very least being less surprised by, for instance, the tax treatment of their chosen withdrawal method.”
*Old Mutual Wealth/YouGov Redefining Retirement survey. All figures, unless otherwise stated, are from YouGov Plc. Total sample size was 1649 adults. Fieldwork was undertaken between 15/05/2015 - 18/05/2015. The survey was carried out online. The figures have been weighted.
Freezing of IHT allowance negates real impact of £1m property exemption
Comment from Rachael Griffin, financial planning expert at Old Mutual Wealth:
“The unexpected freezing of the IHT allowance of £325,000 per person until 2020/21 will negate the beneficial impact the £1m property exemption could have had in real terms.
“Looking at house price inflation since IHT was frozen back in 2009, prices have risen on average by 7.3% a year (based on the mix adjusted rate). If the IHT allowance for a couple, currently £650,000, rose in line with house price inflation (based on a predicted 7.3% ‘simple’ growth rate), by the time we get to 2020/21 the allowance could have be nearing the £1m mark anyway (£934,700).
“This means the enhancement introduced in today’s budget has added extra complexity to the IHT system without benefiting people in any real way. Increasing the IHT allowance in line with house price inflation would have been a more robust and cleaner solution.
“If we take the calculation back even further to when IHT was first frozen in April 2009 the increase would in fact be negative in real terms. Since April 2009 average house prices have risen by 36.6% (based on the mix adjusted rate). If IHT had kept pace with house price inflation, the £650,000 joint IHT allowance would stand at £887,900 today. Add onto this the projected rise calculated above and the IHT allowance could have been worth (£887,900 + 43.8%) £1,276,800.
“This means the £1m IHT property exemption will, over time, have a negative impact in real terms. In 2020/21 we predict it could have a negative impact in real terms of £276,800.”
Data source: ONS - House Price Index (HPI) – published 19 May 2015. Data based on the mix adjusted average house prices. Mix adjusted house price in 2009 was £194,000, in 2014 was £265,000. Average growth between these points was 36.6% (7.3% per year). Forecast prediction based on 7.3% simple growth per year for 6 years = 43.8%.