The budget: Style over substance? What it means for QROPS?
The Chancellor’s budget last week has been hailed in the media as the budget that will “reform the pensions industry”, that will “rebrand pensions for the better,” and that was “a big step forward.”
Indeed, it was a budget in which there were plenty of headline-grabbing ‘policies’. These included all restrictions on access to pension pots being removed from April next year; in which it was pledged that it would no longer be compulsory to buy an annuity; and in which it was promised that death duties on pensions would be cut.
However, in my opinion, it was also a budget that amounted to very little. Like many political and financial experts have suggested, I believe it was more style over substance – and was politically, rather than economically, motivated. Clearly, it was designed to appeal to retirees, who are more likely to vote than younger people, and who are typically more likely to vote Conservative. Next year is, of course, a general election year.
If we scratch the surface of George Osborne’s budget we begin to see a slightly different picture from what has been largely portrayed in the media.
For instance, not only is the scrapping of restrictions on pensions access “dangerous, short-sighted and ill-conceived” – as I have said publicly in the press over the last few days – because it flies in the face of the overarching purpose of pensions (to provide an income throughout retirement), but it also will be a policy that will have little real appeal to the vast majority of people.
Why? Because accessing a pension will be taxed at the individuals highest marginal rate of income tax – which for anyone with total UK income (including Salary, Rental and investment income) over £31,866 will be 40 per cent and 45 per cent on all earnings over £150,000 – anyone who has worked hard and saved hard all their life for their retirement will be, rightly, loathed, to drawdown their pension and handover almost half of their nest egg to the Treasury, simply for the privilege of having earlier access to their own funds. The average pension transfer we encounter is £320,000 which will lead to considerable tax charges if accessed all at once.
Similarly, there’s been much misinformation and hyperbole regarding the scrapping of the compulsory purchase of an annuity policy. The requirement to purchase an annuity was actually removed in the 2011 budget and people could opt to take income drawdown instead. However, despite this change the number of people taking annuities remained relatively unchanged
Whilst I support releasing individuals from buying annuities because it encourages people to save, knowing that they can access the full capital rather than purchase an annuity, I suspect that most people will continue to buy annuities not realising that there are better ways to create an income in retirement.
The other big news was, of course, surrounding death duties on pensions. The government claims that it “wants to ensure the current tax rules that apply to certain pensions on death continue to be appropriate under the new system”, and highlights that “a flat 55 per cent charge will be too high in many cases in the future”.
The details are yet to be published, but it is likely that they will be replaced by a tax at the highest margin rate, so a reduction from 55 to 45 per cent – which is still an incredibly high rate and something that most financially-savvy individuals will be looking to reduce in order to leave more of a legacy to their loved ones.
So, reviewing just these three areas, which have been flagged up by Osborne supporters in the press as “pioneering” and “ground-breaking”, there’s not much that could be described as ‘impactful.’ Apart from appealing to ‘grey voters’ in political terms.
Civil service pension transfers
To my mind the primary change for our industry is that civil service pensions will not be able to be transferred to unless there are exceptional circumstances. We don’t know yet what the ‘exceptional circumstances’ are but, naturally, we hope it is when the pension holder lives abroad.
The government’s reasoning behind stopping civil service schemes transferring is that they are massively underfunded and they will be left with the debts.
now that they have publicly admitted their schemes are underfunded we should now be focusing further on civil servants who want to review their pensions options and take advantage of any alternative arrangements, such as QROPS, that may be available to them before the government disempowers them to do so.
On another note, it should also be stated that the government is actively reviewing the possibility of prohibiting the transfer of all defined benefit schemes. The reality is many DB schemes actively want people to transfer out in order that they can reduce their future liability. And again, with this in mind, this should perhaps be an area on which we, as advisers, should be now prioritising. It is also worth bearing in mind that many companies want to reduce their exposure to defined benefit obligations and will therefore strongly oppose the Government proposal.
One area of pension planning that I don’t foresee demand falling is QROPS for people with UK pensions living overseas. Despite the increased flexibility in UK pensions a QROPS will still allow an individual to heave greater freedom over their pension investments, a choice of major currencies and often far greater tax treatment of the pension both when income is accessed and on the individuals death. Interestingly we have found that QROPS enquiries have increased since the government’s proposals were announced.
In short, Chancellor George Osborne’s 2014 budget was, perhaps unsurprisingly, an electioneering budget that promises a lot and that will impact little on our sector.
Nigel Green deVere Group
Blog written on 25th