Few, if any, predicted the magnitude of the changes to pensions announced by chancellor George Osborne in his last Budget.
Advisers, pension providers and seemingly even parts of HM Revenue & Customs and the FCA were wholly unprepared. So far reaching was the scope and scale of the announcement that it took weeks, not days, for most commentators to understand the full implication behind the detail. One early conclusion has withstood scrutiny though: Sipp providers are extremely well placed to meet the opportunity and ensure that savers have the full range of options available as promised in the Budget.
An examination of all the key changes will help understand why, although it is important to understand that many are still subject to consultation.
Already available to a minority (investors with a secure minimum income of £20,000 a year) through flexible drawdown, this was the Budget’s single most important change, magnified by the sound bite that announced it: “Let me be clear: No one will have to buy an annuity … People who have worked hard and saved hard all their lives, and done the right thing, should be trusted with their own finances.”
Sipp providers have years of experience providing retirement income for those who choose not to annuitise. Through the various regimes – drawdown, unsecured income and alternatively secured pension – they have built up experience and systems to pay out income under PAYE, and to vary it according to the needs of each individual.
Through the various legislative changes over recent years, the majority of Sipp providers’ systems have proved resilient and adaptable. That is in stark contrast to traditional pension providers, who have struggled to implement changes such as varying rates of drawdown and the removal of alternatively secured pensions.
Pension investors face tax rates of 55 per cent at two points in retirement: a tax on funds already crystallised and a tax on funds uncrystallised when the investor has passed the age of 75. That rate of tax is now under consultation, with some commentators already speculating that it will be set lower than the current inheritance tax rate of 40 per cent, perhaps as low as 20 per cent.
Reducing this rate to the same level of IHT, or even lower, tempers the initial view that these changes will result in investors rushing to withdraw all their pension funds from age 55. It would provide significant incentive and confidence to consider pension funds as an important, holistic part of estate planning. Sipp providers are well placed to take advantage of these changes. Their investors tend to be wealthier and have greater need of such planning: Sipp providers can look forward to them keeping their funds and staying invested for longer.
Complementing a review of the rate of tax on death is a further review on whether tax relief on contributions should continue beyond age 75. Changes to how pensions are treated beyond the age of 75 are increasingly outdated and sit uncomfortably alongside a regime that will soon see the state pension start to pay out only a few years earlier. The number of people still working well into their 70s continues to increase, a combination of improved longevity and fewer manual jobs than a few decades earlier.
