The Budget will drive demand for QROPS
This year’s Budget, last of this current parliament, has been branded in today’s Telegraph as ‘a triumph of electioneering over economics.’
And I can see why. The Chancellor wheeled out a series of policies aimed at the over 55s – who are those most likely to vote in the election and those who are, coincidentally, most likely to vote Conservative. In his speech, George Osborne announced to the House a further reduction to the lifetime allowance (LTA) for pension tax relief, meaning the amount people can save into pensions, tax-free, is now £1m, which is reduced from £1.25m. Since it was introduced in 2006, the LTA is down from £1.5m in April last year, and from £1.8m in 2011. It can be judiciously assumed that this measure will compensate for tax giveaways in other areas.
To my mind, this is a fundamentally flawed move. Why? Because it is a disincentive to save for retirement. It reduces the rewards for saving – and this is incredibly short-sighted!
With the burgeoning pensions crisis and the looming care crisis, amongst many other factors, we need to urgently revitalise a savings culture in the UK as a matter of priority. Continually cutting the LTA goes against this concept.
It is a slap in the face for those who have worked hard and saved hard, putting money aside all their lives in order to be able to enjoy their desired retirement. It is, as I told the press yesterday afternoon, “a cap on aspiration.”
It is also, as I suggested in the City AM newspaper today, a move that sets the scene for a fully-fledged wealth tax – as that is what these limitations essentially represent.
Bearing all this in mind, I expect that more and more individuals will seek alternatives with regards to their pension planning, and we will see an upsurge in pension transfers out of the UK and into an HMRC-recognised QROPS.
When a pension is moved into a QROPS, it is tested against the LTA at the time of transfer.
Moving a pension overseas, thereby becoming exempt from the LTA limit, could prove highly significant as it is likely to be reduced further in the coming years. And, of course, those individuals who transfer could also benefit from access to flexible high-return investments, and having their pensions paid out in their chosen currency, amongst other advantages.
The Chancellor also announced the introduction of new annuity freedoms in yesterday’s Budget, aiming, again, to appeal to the so-called ‘grey vote’.
The change will come into effect in April next year, and will see some five million pensioners with an annuity be allowed to sell or move it in the search for more profitable returns. Beneficiaries of retirees holding joint life or guaranteed term annuities, who pass away before reaching 75, will also receive tax-free payments in the future.
Even though these new flexibilities will be attractive to many individuals, I am confident that the majority of pensioners will stick with their annuities, either because they are sceptical about the change or because they are unaware of alternatives.
However, there is a clear danger of retirees being charged extortionate fees to cash in their annuity, to then see poor value in return. Plus there’s the threat of scammers – likely to be the same as those who are now pursuing individuals to cash in their pension savings ahead of the pension freedoms coming into play next month – who will also be all-too-ready to swoop in on retirees’ annuities.
I am certain that these scammers will look upon yesterday’s announcement as ‘boom time’, and step up their pursuits even further. As such, I cannot stress enough the importance of individuals seeking independent financial advice on the matter of annuities.
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