The 2021 Spring Budget will be like no other, says Andrew Megson, executive chairman, My Pension Expert. With public debt rising daily, the Chancellor has to be careful whom he targets as he looks to repay it, especially if his actions then disincentives pension saving.
COVID-19 has driven unprecedented Government intervention throughout the past 12 months, with three national lockdowns, the furlough scheme and business bounce back loans, to name a few of the initiatives introduced to manage the crisis.
These policies and schemes were undoubtedly necessary to safeguard the survival of businesses and keep households financially afloat. However, they were also incredibly costly.
The Office for Budget Responsibility estimates that the Government will have borrowed £394bn for the current financial year (April 2020 – April 2021) in order to fund these measures; for context, the Government was only expecting to borrow £55bn for the whole financial year.
And now, it is up to the Chancellor to search the public purse in an attempt to repay this mounting debt.
Rumours are rife that pensioners could bear the brunt of these costs. For some years now, there has been speculation about the affordability of various pension policies, such as tax relief and the state’s triple lock pension. And with the Government needing to find money to pay for COVID-19 support schemes, it is feared that the Chancellor will jump at the opportunity to make some savings through pension policy changes.
Although these rumours are only speculative at this stage, they will still unnerve many savers across the UK. Indeed, I believe making dramatic changes to pension policy could cause severe, long-term damage to multiple generations of savers.
With this in mind, I have identified some key points that I hope the Government will consider ahead of the Spring Budget on 3 March 2021.
Rethinking changes to pension tax relief
Pension tax relief is one of the most effective methods of incentivising Britons to save for their future.
It means that when a saver pays into their pension scheme, the money that would have gone to the Government in the form of income tax, is put into the pension scheme instead. The relief is paid at the highest rate of income tax an individual pays; for example, a basic-rate taxpayer revives 20% in tax relief, while top and additional rate taxpayers receive 40% and 45% respectively.
However, given the cost of the scheme, it is rumoured that the Chancellor is re-examining how much a person can save into their pension and still receive the relief. The annual limit is currently £40,000, but analysis has shown that reducing the allowance could enable the Government to make billions in savings.
That said, cutting pension tax relief could damage people’s retirement savings strategies. Many savers will have built their retirement strategy upon the assumption that they will be able to benefit from tax-free savings. Lowering this allowance could therefore pull the proverbial rug out from under savers’ feet, leaving them worse off in retirement.
Cutting tax relief could also discourage younger people from adequately saving for their futures, which in turn may result in future generations of pensioners struggling to make ends meet throughout retirement.
So, I urge the Government to refrain from cutting pension tax relief. While doing so will save the Government money in the short-term, the cost to future generations of retirees could be immeasurable.
Maintaining the triple lock
The state pension triple lock was first introduced by the Conservative-Liberal Democrat coalition Government in 2010. It guarantees that the state pension will rise by 2.5% each year to ensure it does not lose value because of inflation.
Like pension tax relief, the policy is expensive. Figures suggest that scrapping the triple lock entirely in this year’s Budget could save the Government up to £16 billion by 2023.
However, doing so could drive many retirees into pension poverty. Recent research from the Pension Policy Institute revealed that for the poorest pensioners, three in every four pounds of their income comes from the state pension. To cut the triple lock would therefore see the income of society’s most vulnerable people plummet, particularly if the rate of inflation increases, eroding the relative value of retirees’ pension pots.
I sincerely hope that the Chancellor decides to leave the triple lock unchanged, or at the very least, offers a viable alternative to protect vulnerable pensioners. Otherwise, the UK’s poorest retirees could find themselves in a financially dangerous situation.
Protection and education
Finally, the Government should prioritise enhancing protection against pension fraudsters.
The pandemic has caused financial hardship and worry for many Britons. Consequently, many have been left in a state of uncertainty – and even panic – making them easy targets for scammers.
Even at the best of times, scammers use a variety of tactics to persuade people to part with their money and take advantage of victims’ lack of pension knowledge. In the current climate, such threats are rife; research from My Pension Expert found that over one in ten (11%) UK adults were targeted by pension scammers in the first half of 2020 alone.
So, it is vital that the Government addresses this issue – whether in the Budget or through separate initiatives in the near future. The Government ought to examine how they can help savers protect their money from scammers; this could be done using a combination of educational tools and improving consumer access to independent financial advice. Such measures will certainly help savers to identify potentially problematic “schemes” and understand where they can turn for legitimate pension advice.
Of course, the Government must take steps to pay for the necessary COVID-19 support schemes, which have helped so many businesses and households survive the pandemic thus far. However, it would be wrong of the Chancellor to dramatically change the UK’s pension policies with no warning. Doing so could cause huge long-term damage to many people’s financial futures.
Instead, I hope the Government does what it can to help protect savers, be it through education or improved access to advice. I believe doing so will offer greater benefits to current and future generations of retirees.
