Pensions progress


Malcolm Small, the IoD’s senior financial services policy adviser, looks at what the budget means for savings and pensions

The creation of a secondary market in annuities looks like a great idea to help those who were, effectively, forced to buy an annuity in the last few years, or whose circumstances – such as encountering life-limiting illness – have changed.

However, there is a huge amount of work to do to establish whether such a market is economically viable. We welcome the fact that the government is consulting on this proposal rather than just pressing ahead.

The ‘call for evidence’ paper seems reasonably well thought out. However, it starts from the assertion that for most people, staying in their annuity will be the “right thing to do”. In which case, one wonders why the creation of a whole new market is necessary.

The paper recognises that people will need some form of support in making what could be a complex decision, whether that be the “guidance” on offer from April, or full-fat, regulated, financial advice.

It also acknowledges that people cashing in their annuities could well fall foul of the benefits system and effectively do themselves out of money they would otherwise be entitled to. I still don’t see how the market would operate effectively for either providers or consumers.

Purchasers of such annuities would be assuming mortality risk, and so would require the annuitant to go for a full medical examination, at considerable cost to the purchaser. This, and other factors, would need to be reflected in the price offered, which might then become a considerable “discount” representing poor value for the annuitant. Those needing the money most, perhaps the terminally ill, would, in all likelihood, find the offer from the purchaser derisory. I sense a real minefield here.

The motivation for the lifetime allowance changes appears to be the limitation of tax relief on pension saving, in which case why not lower the annual allowance, which was always designed for that purpose, rather than the lifetime allowance?

The IoD has always regarded the latter with suspicion and would prefer to see it abolished altogether; the annual allowance is all the control needed. As things stand, the advice for those with, say, £500,000 in a pension and 15 years to go to retirement will now probably be “stop contributing” as market gains may well get you to the lifetime allowance in that time frame.

The search for alternative retirement funding vehicles now begins in earnest. The reduction in the lifetime allowance is, frankly, not good news. A sum of £1m sounds like a lot of money, but will buy an annual income of just £30,000 at four per cent withdrawal after taking the pension commencement lump sum of 25 per cent. This is effectively a penalty on the prudent, and will catch many of those still in defined benefit.

When it comes to savings the exemption of the first £1,000 of interest is welcome, although its monetary effect at current interest rates will be miniscule. The idea of a Help to Buy Isa has been discussed in policy circles for some years and is superficially attractive, but the scheme outline attached to the Treasury papers is high level indeed.

We see potential for this to be difficult to operate for the financial services industry, hard to police and potentially market-distorting in the maximum value of house purchase proposed. The exemption slightly begs questions about why we need cash Isas, although given the restrictions on this for 40 per cent taxpayers and absence of the exemption altogether for 45 per cent taxpayers, perhaps that’s our answer. However, £1,000 of interest at current rates of typical interest implies a nest egg of £200,000, which would in turn imply an extremely prudent basic-rate taxpayer.

In conclusion, the Help to Buy Isa looks, unfortunately, like gesture politics. The maximum that can be saved in one of these schemes is £9,000, with a £3,000 top-up from government when you cash in to buy that house, making £12,000 in total.

The maximum value of house purchase that can be valid for the scheme is £450,000 “in London” (London is not defined) or £250,000 elsewhere. Even in “elsewhere” this will only be five per cent of the total required, and, following the FCA Mortgage Market Review, 95 per cent mortgages are somewhat rare, with 90 per cent being the standard maximum.

For “in London” it’s even worse, and even if you are one half of a couple saving, this scheme won’t get you to “deposit heaven”. The elephant in the room here, unfortunately, is housing supply, which drives prices ever higher and pushes aspirant homeowners off the market.

Perhaps the “northern powerhouse” will ride to the rescue here, as free markets operate to correct the imbalances. We can only hope so. Until such a time, it seems we have another budget that gives with one hand and takes away with the other. Some people call that “fiscally neutral”. Others call it a missed opportunity.



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Malcolm Small

Malcolm Small

Malcolm Small is the IoD's senior financial services policy adviser

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