02 March 2023
Ahead of the Budget on 15 March, Quilter’s pension and financial planning experts set out what they would like to see addressed. Below are three pension and three tax and financial planning asks that would help relieve some of the pressure of the cost of living crisis and address unfairness in the way the nation’s finances work.
Pensions
- Scrap perverse MPAA during cost of living crisis
- Make the LISA fit for purpose
- Abolish age 57 Normal Minimum Pension Age changes
Tax and financial planning
- Reinvigorate gifting laws and bring them in line with inflation
- Overhaul the irrational way Child Benefit works
- Accelerate the thaw of frozen tax thresholds
Pensions
Jon Greer, head of retirement policy at Quilter:
- Scrap perverse MPAA during cost of living crisis
"Jeremy Hunt this winter has called on older people who dropped out of the workforce in the pandemic to return to help ease chronic labour shortages and also help the UK out of this period of stagnation.
"However, perverse legislation disincentivises people returning to work if they have dipped into their pension.
"Under current legislation, any individual who accesses their pension flexibly triggers the MPAA, with the effect of reducing their annual allowance from £40,000 to £4,000 and thereby limiting their capacity to save into a pension once they return to work.
"Considering the huge sea change that happened to the world of work due to covid it would make sense to relax the MPAA rules. Whilst on its own it is not the silver bullet to ease the chronic labour shortage, the MPAA does provide a disincentive for those aged over 55 to access their pension flexibly in time of financial difficulty and punishes those that do by imposing a punitive tax penalty on future annual pension contributions over £4,000 thus putting a huge barrier up to people returning to work.
"The MPAA should be restored to the pre-2017 level of £10,000 per annum. This would alleviate the risk of hitting the MPAA for most people with earnings of less than £100,000. However, it might be worth overhauling the rules completely and implementing an approach similar in part to pension commencement lump sum recycling pre-planning condition which appears to work effectively in practice."
- Make the LISA fit for purpose
"There is no doubt at all that the government needs to carefully examine how it helps ensure more people save for their retirement, but the LISA represents a Frankenstein’s monster of a product. The benefit of hindsight is a fine thing, but if we were able to start with a blank piece of paper again it’s unlikely a similar product would see the light of day. The LISA attempts to fix two polar opposite problems; saving for a house and saving for retirement and fails to do either adequately with even its name not alluding properly to either of its main purposes.
"On the face of it the 25% bonus is attractive and could be an excellent way of helping to give ‘generation rent’ a helping hand onto the property ladder or an additional boost to retirement savings. However, the punitive 25% penalty means that those who have done the right thing by saving are penalised if they need to access their cash, which given the current economic climate might be more likely. At the very least the government should only take away the bonus rather than raid people’s savings as well. This could easily be achieved by dropping the 25% penalty to 20% essentially ridding the product of an exit charge levied on people’s actual savings.
"LISAs also add unnecessary complexity to the retirement space. A good example of this is the age you can access a LISA doesn’t marry up with the normal minimum pension age of 55 for other pension products, which is soon rising to 57. The reality is we need to get more people to save for their retirements and that is achieved through continuing to evolve successful and transformational policies schemes like Automatic Enrolment. Adding more products like the LISA muddies the water when effort should be ploughed into the pension. Make the LISA explicitly to do with housing and rename it so that people can easily understand its purpose.
- Abolish age 57 NMPA changes and avoid adding unnecessary complexity to the system
"The government should look to abolish plans to increase the Normal Minimum Pension Age. In 2014, the coalition government announced it would increase the NMPA from 55 to 57, deeming it appropriate for the NMPA to be set 10 years below the state pension age. In February 2021, the government announced it would increase the NMPA to 57 in 2028 and provided details of a protection regime.
"Indications suggest that a material number of pension savers qualify for a protected age of 55, which will add considerable complexity to the retirement planning process.
"We believe that the change has been ill-thought through, with scant evidence that the change would alter behaviour. Therefore, the government should reconsider its position by leaving the NMPA unchanged at 55.
"Restricting access to pension savings for an extra two years isn’t likely to change their behaviour and will do very little for their future retirement prosperity since only a very small proportion of customers access their pension at the earliest age and those that do at the earliest age are unlikely to be sustained by their pension pot till they die. However, it will dramatically complicate the retirement planning process and would add unnecessary complexity to the pension landscape."
Rachael Griffin, tax and financial planning expert says:
- Reinvigorate gifting laws and bring them in line with inflation
"With inheritance tax thresholds frozen until 2027/28, it is imperative that the government this budget look at the available gifting laws and make them fit for purpose for modern times. Huge inflation on top of the cost-of-living crisis which disproportionately impacts young people means we need to be making it as easy possible for money to cascade to the next generations who need money in their pocket today.
"The annual exemption currently allows you to give away £3,000 worth of gifts each tax year without them being added to the value of your estate even if you die within seven years of making them. But this was set in 1981 and hasn’t changed since. Had the allowance tracked inflation, it would be permissible to gift nearly £10,200 per tax year to the end of 2022 according to the Bank of England’s inflation calculator.
"Given the allowance has been unchanged for more than 40 years and considering the economic backdrop this budget it would be wise for Hunt to change this and give a well needed carrot to a public who have suffered a lot of stick.
"In 2023, we expect there to be a number of announcements of consultations of review, which will likely continue to buy time for the government while they appear to address issues that could be very simply fixed.
"Even if the various allowances are not uprated to help increase the amount of people making lifetime gifts all the allowances could be amalgamated into one annual relief at a rate that better reflects current inflation."
- Overhaul the irrational way Child Benefit works
"There are some perverse and unfair elements when it comes to how much child benefit people receive. Firstly, it is completely wrong that a couple both earning £49,999 will have no reduction in their child benefit but a single parent earning over £50,000 will start to lose part of the payment. This penalises single parents who already have significant struggles to content with without the government making it even harder.
"Secondly, Child benefit is not means tested and if one earner in a family makes more than £50,000 a year, they must pay back 1% of the Child Benefit they receive for every £100 over the threshold. However, a basic rate taxpayer can earn £50,270 before falling into the higher rate band, meaning basic rate taxpayers are currently in scope for a tax charge aimed at higher earners. Over the past few years wage growth has pushed salaries up but this wage growth has been in response to significant inflation so many people even on higher salaries in real terms don’t feel richer.
"The government as a priority at the very least should move the threshold at which point people start to pay the high-income child benefit charge to £50,271 – the rate at which someone becomes a higher rate taxpayer. Particularly at a time when finances are stretched like they are it seems unfathomable that basic rate taxpayers are being caught out by a charge that is not designed for them. The government has failed to increase the HICB charge in line with income tax thresholds and as such they are now greatly benefitting from a quirk in the system that will catch many out.
"The UK tax system is already complicated at the best of times. Failing to have the HICB charge aligned with income tax bands just makes things even more complex."
- Accelerate the thaw of frozen tax thresholds
"Following the mess of the mini budget in October, it was clear that Jeremy Hunt needed to steady the ship and navigate out of the very choppy waters created by Truss. It was therefore understandable at that point that a whole raft of frozen thresholds were put into place with some stretching as far as 2028. However, we are now hopefully living in a more predictable era. The economic outlook while still bleak for the time being is not as catastrophic as first thought.
"Therefore, we should re-think some of the frozen thresholds with income tax levels particularly ripe for early reprieve. Our own FOI found that HMRC forecasts nearly 1.5 million more people to be dragged into higher tax bands by 2027. The majority of those (1.13m people) will become higher rate taxpayers and these people may not feel wealthier as their salaries have simply kept up with inflation. This means that in real terms their buying power remains much the same, yet their salaries are taxed much more. It is understandable the government are keen to refill public coffers, but this should be balanced with a fair tax system that is not dragging more and more people into higher taxes."
