The space01 budget review

A Budget presented with just months to go before a general election was going to be an intensely political one, and even more so with the two largest parties neck and neck in the polls.

In addition, the UK’s finances remain incredibly tight despite the improving economy. The risk in these circumstances is that the financial services industry could have been left dealing with election promises rather than well thought through policies.

But has that proved to be the case? Below, the Space 01 blog takes a look at a handful of big policy announcements and considers how credible they are, the implications for financial services and indeed any potential systems changes below.

1. The cut in the lifetime limit for pension tax relief to £1million remains – in Government eyes – a relatively painless change. It only affects the very top end of pension savers. Indeed the Coalition almost had a free pass politically, because Labour had already proposed even deeper cuts to relief. It will, however, make some aspects of tax planning significantly more complicated.

The reaction

In the FT.com, Merryn Somerset Webb says the lifetime limit cut will result in a mess for pension planning and many IFAs will agree.

The lower the ceiling gets, the more it is likely to prove a disincentive to at least the upper tier of middle income pension investors. To put it in context, some campaigners and a former Labour government pension minister Lord Hutton are calling for a goal for workplace pension contributions of 15% of salary. A limit of £1m is getting very close to point where those at the higher end of the middle earnings bracket may not see the point of such a high contribution rate.

Space01’s view

It is indeed another complication to pension planning, though consumers will definitely get value from taking advice on this issue especially when taken into consideration with the pension freedoms and the big uplift for ISAs brought in last year. On the systems front, it may require some adjustments to calculators and other information that help people work out what they may be able to build as a pension given a particular level of contributions, alongside other tax wrappers.

Yet this reduction from £1.8m to £1m over the last few years is also an issue to consider for future campaigns, because as one IFA has argued, it takes the aspiration out of pensions. In a world where just about everyone has a defined contribution plan, convincing people to put more in a pension may become more and more important. We can make that process as simple and effective as possible, but government incentives always help.

Short term, it may also be worth putting together some messages to better off clients and customers warning of less generous times ahead in terms of reliefs. It could include those lucky enough to have a DB scheme and in a high salary bracket. Top civil servants and doctors in the NHS scheme spring to mind because they may progressively lose out from the lifetime limit and may want to consider other planning options. There may well be a case for a group of professionals who haven’t always sought financial advice to start consulting with financial advisers. Can we convince them?

1. The Help to Buy ISA, where the Government will provide up to £3,000 of contributions to those who manage to save up to £12,000 is aimed at helping first time buyers build up substantial deposit. It builds on a growing set of Help to Buy initiatives. It launches in the autumn, so there is time for the industry to plan.

The reaction

The scheme has been welcomed by many brokers and lenders but has also been criticised for helping another small group on to the housing ladder, while potentially stoking even more price inflation. Many experts say this will have to be dealt with eventually by the UK building more homes. In the Independent newspaper, Simon Read, as part of a useful Q&A, asks whether the Help-to-buy Isa will be of real benefit to many first time buyers because of house price inflation.

Space01’s view

There is a debate about whether government resources should be devoted to helping more young people on to the housing ladder. However, we do rather like an idea which does at least revive the concept of saving a substantial deposit, before buying a home. It allows lenders to offer better value loans, and borrowers can avoid very high loan to value mortgages. Obviously the cost of homes especially in the Southeast is hugely challenging. But at Space 01 we already have some thoughts about what an eye-catching campaign around this product might look and sound like in terms of promoting a sensible way of buying a home. And in this case, government incentives are a real help not a hindrance.

1. The annuity resell plan. This must be the most political of all the Budget measures. Many commentators have suggested that it was simply impossible to deny more than 5 million people the right to access the very popular Freedom and Choice in pensions reforms simply because they have an annuity already. The government is planning for a 2016 launch allowing for substantial consultation (for a change). It does not envisage existing providers breaking up existing contracts. They will be sold on to third parties – though not individuals.

The reaction

Many experts do not believe a second hand market will really get off the ground. Pension providers say that cashing in a poor value annuity will only make matters worse. They also suggest cashing in a good-value annuity – perhaps an enhanced contract – makes very little sense either. A contract could lose 30% of its value in either case. It may also require a medical. Simply removing the tax penalty is not thought to be enough to encourage a second hand market, though it is clear the Treasury appreciates this too, given that it wants to explore how such a market might develop in the next 12 months. The Budget also contains a warning for up to 650,000 people on means-tested benefits who sell their annuity – the State has no intention of making up any subsequent fall in income. Others says advice will be crucial, but will consumers pay for it?

Space 01’s view

The pension industry, currently grappling with huge system changes from the Freedom and Choice reforms, will be breathing a sigh of relief that there is a one-year consultation on the annuity re-sale plan, though IFAs say they are already taking calls from interested annuitants. Those eager consumers will obviously have to wait. The next year will allow the industry to test out possible systems and communications. We envisage an interesting dilemma for annuity providers. Most pension firms will be certain that there is little benefit to consumers from cashing in. As the annuity will remain in payment albeit to a second party, these providers have very little incentive to encourage change. Then again, for some providers and certainly advisers, there could be a broader relationship with those customers/consumers to be maintained. Customers may demand information.

Crucially, this April, we will know how a huge cohort of consumers will behave when they can access their pension cash, rather than simply predicting how they will behave. There is no direct read across, but it will tell the industry a lot about the practicalities of developing a second hand market, and about delivering information about this type of decision. The fact that there is consumer demand suggests that despite the barriers, a secondary market of some description may develop.

It is worth noting that the Treasury believes it will receive additional revenue of around £1bn in income tax from cashed-in annuities in the two years after 2016. Hargreaves Lansdown suggests this would mean 250,000 annuities being resold. That firm has doubts whether the market will ever see the light of day, yet we suspect this market will prove attractive to some new entrants at least.