The pension revolution - what will survive post Brexit vote?
The George Osborne-fuelled pension revolution could quickly run out of gas under the new Conservative party leadership. Brexit negotiations will be all-encompassing and the Government may need to raise funds to shore up the faltering UK economy.
But what will all this mean for the Government’s existing reform agenda? Which policies will make it through, and which will be crushed in the fallout from the referendum?
Here I look at a series of radical money-raising options available to the Treasury, the existing reforms that could be sidelined and the odds (for illustrative purposes only) on each happening.
1. Death tax reforms to be reversed. Odds: 4/1
Recent changes to the treatment of pensions on death – allowing savings to be passed on tax-free when someone dies before 75, and taxed at the recipient’s marginal rate post-75 – may look generous in a post-Brexit world.
While the reform was introduced with some fanfare by Osborne – and made pensions more attractive as a tax planning vehicle – reversing it in these exceptional circumstances may be seen as a relatively uncontroversial way to raise cash for the Treasury.
2. Lifetime ISA delay: Odds: 2/1
Widely believed to be a potential frontrunner to fundamental pension tax relief reform, the Lifetime ISA remains in the gestation phase and crucial details have yet to be clarified about how it will work in practice.
For example, we still don’t know whether contributions above £4,000 a year that wouldn’t receive the 25% Government match will be allowed. The Treasury is also yet to confirm whether borrowing will be permitted, or the criteria for accessing your pot penalty-free before age 60 expanded.
Given these uncertainties, April 2017 now looks extremely ambitious as a launch date.
3. Pension tax relief reform: Odds: 3/1
The Treasury spends around £34bn a year on pension tax relief, so it will almost certainly be part of any conversation about reducing Government spending if the public finances do suffer following the Leave vote.
However, the future Chancellor will inevitably weigh up the case for raising money for the Treasury against the risk of angering the electorate and Conservative backbenchers.
So, while fundamental reform – such as abolishing higher-rate relief or introducing a radical pensions ISA system – may be off the table for now, further cuts to the annual and lifetime allowances may provide a more palatable alternative.
4. Secondary annuities delayed or scrapped. Odds: 6/1
This is a tricky one for the Treasury. On the one hand, reforms to allow people to trade in their annuities are set to be a big money spinner for the Exchequer’s coffers, so delaying or abandoning the changes will be costly.
However, it remains uncertain how the market will shape up or who will come forward as annuity buyers, while clarity has yet to be delivered on how advice will operate.
With civil servants set to be sidelined by Brexit negotiations, the future of these reforms looks wobbly at best.
5. State pension triple-lock removed. Odds: 10/1
The triple-lock, which guarantees the state pension rises with the highest of earnings, prices and 2.5%, would have been in severe jeopardy had George Osborne followed through with his promised post-Brexit emergency Budget.
However, confirmation the ‘punishment Budget’ will not happen, coupled with the fact the Brexiteers have pensioners to thank for their victory, makes removing this valuable benefit politically tricky.
6. Pensions Bill 2016 delayed. Odds: 7/1
The Queen’s speech confirmed a new Pensions Bill will be unveiled later this year. The key elements include improving protections for people saving in master trusts, capping early exit penalties and restructuring the delivery of financial guidance.
Stronger regulation of trust-based pension schemes and ensuring savers have access to useful, relevant retirement guidance are both critical to supporting the UK’s pension system.
However, legislating for Brexit now becomes the priority for Whitehall, so it would be no surprise if the Pensions Bill was kicked down the road to make way.
Ultimately which, if any, of these policies make it through the current hurricane of uncertainty and confusion depends on how the economy fares and who takes the helm following the Conservative leadership election.
But one thing is almost certain – the chaos wrought by the Brexit vote will continue to dominate the agenda throughout 2016.