The last couple of years has been a hot-bed for rumours about the reduction in pensions tax relief for higher-rate taxpayers. But despite the on-going speculation, no major changes have taken place. The last Spring Budget will take place on 8th March, and this may be the final chance to introduce such a change in this Parliament.
The long shadow of Brexit
It’s likely, once the European Union (Notification of Withdrawal) Bill 2016 has received Royal Assent, that Article 50 will be triggered very soon after. The Spring Budget may therefore be a low-key affair, overshadowed by preparations for Brexit negotiations, with few changes for pensions and investments. However, with inflation creeping up, the government could have a desire to do simple things such as boosting the tax-free personal allowance to help lower earners.
What we would like to see:
A long-term vision for UK pension provision
For too long, we have had rife speculation over the future of pensions tax relief every six months, at the time of Budgets and Autumn Statements, causing confusion for pension savers. Nucleus would like to see a cross-political group work together to develop a long-term vision for UK pension provision. Putting an end to constant speculation will help people understand the benefits of using pensions to save. This is crucial at a time when automatic enrolment is coming of age, and minimum contribution limits are increasing to their full level.
People need to have confidence the current rules will stick without significant change or limits being downgraded. The constant tinkering with pension legislation – and the rumours of change – only puts people off saving for their later life.
That isn’t to say improvements can’t be made to pensions legislation. We would welcome changes to remove discrepancies or to simplify the rules and regulations. These could greatly help advisers and their clients navigate the pensions quagmire and save more effectively.
Changing the taxation of flexi-access drawdown
Payments from flexi-access drawdown (Fad) have be taxed on an ‘emergency month one’ basis, unless the provider had an up-to-date tax code for the client. This means providers often have to deduct too much tax, forcing clients to reclaim tax through one of three forms.
Up to the end of 2016, over 70,000 forms have been submitted to HMRC, and over £175.6m of overpaid tax has been refunded to clients.
We would like the taxation of all drawdown income to be on a ‘month 12’ basis (as it is for capped drawdown). This would significantly cut down on the number of overpaid tax claims, cutting administration for clients and advisers, but also for HMRC as well as reducing its costs.
The consultation on the Money Purchase Annual Allowance (MPAA) closed on 15 February. In its response, Nucleus was concerned the reduction in the MPAA to £4,000 sat at odds with the key government policy of encouraging people to work for longer, as it wouldn’t allow people who wanted to merge working with taking some retirement income to continue to save into their pensions. It shows on pensions freedom the government is talking the talk, but not walking the walk.
We hope the Government has thought again on reducing the MPAA, and instead considers other actions, such as tightening the pension recycling rules to better focus on preventing people from abusing the tax system.
A simpler Isa regime
Individual Savings Accounts (Isas) are a key part of a client’s financial planning. But since their inception in 1999, they have gradually become more complicated with the addition of new types such as innovative finance and lifetime, new ‘products’ such as Junior Isa (Jisa) and Help-to-Buy Isa, and new features such as flexible Isa and additional permitted subscriptions (APS).
We believe now is the right time to take another look at the Isa rules. With the guidance notes running to over 100 pages, the rules on types of Isa, how much people can pay into what Isa and when, all need simplifying. This would make it easier for advisers and their clients to understand the savings market, and to make the most of the tax advantages Isas offer.
New NS&I products
The Autumn Statement announced the launch of a new savings bond to be launched in Spring 2017. The new bond will have an interest rate of around 2.2% for up to three years, on a maximum of £3,000 savings, and be available for 12 months.
We would like to see further NS&I savings products launched to incentivise households to save more. This is even more pertinent since the Bank of England forecast the savings rate will fall to 4% this year, the lowest rate since the early 1960s.