Ian Browne, pension expert at Quilter says:
“There are a few unusual things about this year’s budget, it’s on a Monday and it’s in October. However, one thing that hasn’t changed is murmmerings about pension tax relief. Figures today show that gross pension tax relief is projected to be £38.6 billion, so it’s not hard to see why the chancellor eyes it up when he needs to find extra money behind the cushions. However, rather than arbitrary cuts to allowances, it makes more sense to target outdated factors. HMRC currently requires DB schemes to multiply the annual pension by a factor of 20 when calculating the capital amount to be assessed against the Lifetime Allowance. This figure was based on the original £1.5m allowance set back in 2006 by Gordon Brown.
“To allow people to plan for their future, Brown said the allowance would increase every year to reflect inflationary increases, a promise that was kept for five years. However, the conversion factor has not been touched meaning it is now vastly out of date with the current transfer values on offer and has also meant there is a discrepancy in tax treatment towards DC and DB pensions.”
“Over the past decade the sands of pensions have dramatically shifted and so it’s of little surprise that the latest figures from the Office for National Statistics reveal, in general, an uptick in the number of people contributing to personal pensions from 7.6 million to 10.3 million. However, trends within this overarching theme reveal some interesting movements that need to be considered. Encouragingly a huge portion of this increase is coming from a substantial 64% jump in the number of women contributing to a pension compared to a 19% increase in men. But this increase was not across the board as the number of women aged 35 to 44 years old has dropped and there are less women in this age group compared to both the 25 to 34 age group and the 45 to 54 age group. This could be for a number of reasons, but is likely to include that women are traditionally more likely to take a career break in order to raise a family. Any gaps in pension funding need to be taken account when considering planning for a retirement, particularly during what is normally considered the accumulation stage of life.
“Another stark dichotomy in pension saving is seen between the employed and the self-employed. Since 2007 the number of employed people contributing to a pension has jumped 42%, with average contribution levels dropping slightly. On the flip side the number of self-employed putting their money into a pension has dropped 63%, while their average annual contributions have gone up. This seems counter-intuitive given the self-employed population has been rising over the past number of the years. This lack of pension saving by the self-employed has not gone unnoticed as policymakers have been considering the conundrum over the past number of years – including whether this group need to be auto-enrolled. A savings policy for the self-employed needs to acknowledge that there are legitimate reasons why some self-employed people do not engage in pensions, particularly those on lower incomes. One of the biggest challenges facing this group is the lack of certainty and security of income. It makes sense to keep an open mind about creative savings solutions for the self-employed and we hope the DWP will consider a pension ‘sidecar’ which would give early access to cash if required, which could be helpful to self-employed people with volatile or insecure income.”
Danny Knight, investment director at Quilter Investors comments:
“One of the huge successes of the government’s personal finance policies in recent years has been the massive growth in the number of younger people actively contributing to a pension. When you are investing for retirement you can really benefit from starting early, giving your investments the maximum opportunity to benefit from compound returns over time. Being in the market for longer can make a huge difference, and missing out on compounded growth can mean you need to contribute much more in later life if you don’t invest early.
“Younger savers could also be thinking about taking some additional investment risk in order to maximise their opportunity for long-term gains. One of the challenges of the current savings and investment system is that many people across the age groups still don’t make active decisions about how they want to invest. In the older age groups, we know from the financial regulator’s own review of the market that many people are invested in cash in retirement, putting themselves at risk of losing money in real terms. Among younger people age groups, most will be contributing an amount pre-determined for them and will go into the default investment plan. Pension investors in their 20s and 30s may want think about taking more investment risk, for example by investing in a higher proportion of equities, to give them the chance to grow a larger pension pot by the time they reach retirement age. For younger investors, retirement saving is more about focussing on the goal you want to achieve in terms of building up a larger pot, while for older investors it is likely to be more important that they manage the short-term fluctuations in the market to guard against some of the investment risks they face when entering decumulation.