Today in his final pre-election budget announcement the Chancellor, George Osborne, delivered a political manifesto of a speech, with the main focus on the young, the old and business. On characteristically rumbustious form, Osborne painted a picture of a UK where the “sun is starting to shine” but where we are still “fixing the roof.”
Michael Whitfield, CEO of Thomsons sums up his view on the further reform to annuities as follows:
“Whilst I applaud the intention to give people greater pension freedom and a new opportunity to sell back their existing annuity, common sense must be applied too, with a reasonable time limit imposed on any proposed retrospection.
It will be total chaos to unravel up to 5 million people’s annuities based on today’s further announcement by the Chancellor. If this additional change to annuities goes ahead unfettered I predict a nightmare scenario where thousands of hard up folks will go further into hock and never escape.
With this latest pension reform - which will allow people who have already purchased an annuity to change their mind - insurance companies, already reeling from the cumulative effects of Auto-Enrolment, the Retail Distribution Review and the imminent arrival of “pension freedom” in April (the ability to cash in all of your pension rather than buy an annuity) must be queuing up to get ready to wave their white flags and surrender fully to Steve Webb and the Coalition Government.
If we really are to achieve a “come-back Britain” then the government needs to do more to encourage financial education among every generation of worker, not just pensioners so they can make informed choices about flexible ISAs, savings and annuities.
Employers are best placed to help employees with this challenge, and I’d like to see companies incentivised to educate their staff on how to make the most from their financial reward packages.”
Below we outline the notable points for employers to take account of from today’s announcement.
1) The War for Talent is Returning with a Vengeance
Predictably with an election weeks away, the Chancellor was at particular pains to point out how hot the employment market in the UK is with the latest economic forecast of 2.6% growth, 50% faster than Germany and seven times faster than France. He described growth as being “broadly balanced across sectors” as well as becoming more balanced across the UK, as employment in the North East, North West and the East Midlands is growing faster than in London.
He claimed that:
- The UK was enjoying the highest rate of employment in its history (with an unemployment rate of 5.3% expected for this year)
- There are more women than ever before in the workplace
- Since Q1 2010 over 70% of the increase in employment had come from full-time workers, and in skilled areas with the number of apprenticeships doubling
- Earnings growth has been strengthening, with total pay up 2.1% in the three months to December 2014 compared to a year earlier
- With continued low inflation at 0.3% in January 2015, (down from 0.5% in December 2014 on average), households would be around £900 better off in 2015 than they were in 2010, with OBR forecasts indicating that Real Household Disposable Income per capita is set to grow every year for the rest of the decade.
Whilst the War for Talent is clearly back this time there is a distinct change in direction which is all about generational engagement and the Chancellor commented specifically on the development of the four-generation workforce, noting that older workers are playing a greater role in the labour market, with the number of over 50’s in the workplace at its highest level since records began.
2) People Save Money – not Saving People Money
Osborne left his most interesting changes until the end of his speech where he announced new policies designed to create a “savings culture”.
a) Flexible ISA – available from Autumn 2015
In addition to the increase in ISA limit to £15,240 (from April 2015), a "fully flexible" ISA will allow people saving to withdraw their money, and put it back later in the year without losing any of their tax-free allowance.
Comment: The small increase of £240 (or 1.6%) on the ISA threshold is much less than the significant changes brought about by the 2014 budget (where it increased from £11,520 to £15,000 and restrictions of cash/stock limits were removed) however it is a step in the right direction.
The introduction of increased flexibility allowing people to withdraw their savings at will and not losing the tax free allowance will have a positive impact on the willingness of people to save, and should encourage more employers to consider this as part of their reward strategy. However, as with all such products employers need to consider this in conjunction with the provision of good financial education to avoid the rash withdrawal of savings to pay for unexpected expenses or one off luxury purchases.
b) Help to Buy ISA – available from Autumn 2015
A new ISA for first-time home buyers that will allow Government to top up savings by £50 for every £200 saved for a deposit (up to a maximum of £3,000 bonus). The bonus will be available on home purchases of up to £450,000 in London and up to £250,000 outside London.
Comment: This is a scheme which could revolutionise the first time buyer market and make mortgages much more achievable. Encouraging employees to save by giving them financial rewards topping up their savings towards an ultimate goal – a property, will go a long way.
The scheme works as a tax cut for first time buyers and encourages saving. It does not however solve the root cause of employees’ ability to spend/save.
Considering the approximate average full time salary in the UK is £26,500 (and disposable income from this being approximately £187 per month) there remains a huge need to support staff with their ability to save and budget for financial goals.
c) Personal savings allowance – Available from April 2016
The first £1,000 of interest earned on your savings will be tax free. (Higher rate tax payers allowance will be set at £500).
Comment: The chancellor noted “savers have paid tax already on the money when it was earned – they shouldn't have to pay it again”. Hear hear.
This change compliments the approach to ISAs and savings the government have taken but only provides a product for people to save money into and does not reduce tax, spend or free up money for people to physically save however. Products which encourage employees spend (by offering discounts on purchases) are nowhere near as effective as those which save employees money on their regular realistic outgoings, freeing up disposable income and allowing more of that income to be saved.
d) Gift aid – Available from April 2016
The maximum amount for automatic claiming on Gift Aid increased from £5,000 to £8,000, positively impacting 6,500 small charities.
Comment: This will loosely impact the employee benefit Give As You Earn, allowing charities to more efficiently process donations with more money being passed back to them by HMRC on charitable donations.
3) Pensions and National Insurance
a) Pensioners will be given the freedom to sell their annuity for a taxable cash lump sum
Comment: Whilst the intention to be fair to those who have already locked into an annuity is likely to be well received by some pensioners, there seems to have been little common sense applied with regard to how providers will actually be able to facilitate this complex unwinding process. The devil will definitely be in the detail here when the Government have actually worked out what the detail is and how many of the 5 million current annuitants will be affected!
b) Reduction in the Life Time Allowance from £1.25m to £1m from 2016
Comment: Another raid on pensions is upon us as the Chancellor looks to save £600m in tax relief by further limiting the amount savers can tax efficiently pay into pensions. This is due to be offset by a move to index link the Lifetime Allowance from 2018, and protect this limit against inflation. The Chancellor claimed that the cost of pension tax relief had increased to £4bn (unsurprising given the millions of new savers contributing to pensions for the first time on the back of government mandated auto-enrolment) and that these new measures would affect less than 4% of savers.
We see these changes as largely predictable and a simple way for the government to generate tax savings whilst flying in the face of better retirement outcomes for pension members. One crumb of comfort is that the Annual Allowance and tax relief rates have not been touched…..for now.
c) Increasing the Income Tax Bands
Comment: The amount someone has to earn before paying tax will rise to £10,600 from April 2015, £10,800 in 2016-17, and £11,000 from 2017-18. In addition, to ensuring that the full benefits of the Personal Allowance increase are passed on to higher rate taxpayers, the Chancellor has also agreed to increase the threshold at which higher earners start paying 40% tax. This will now increase to £42,700 from 2016-17 and £43,300 in 2017-18.
For those earning in excess of £100,000 the Personal Allowance will continue to be removed at a rate of £1 for every £2 earned above £100,000 meaning that from 2017-18 the Personal Allowance will be completely removed for anyone earning above £122,000. There has been no change to tax relief rates which continue at 20%, 40% and 45% respectively linked to earnings – a welcome relief.
d) National Insurance Contributions (NICs)
Comment: The Chancellor has announced that Class 2 NICs will be abolished (for those self-employed). Also, from 6th April 2015 employers with employees under the age 21 will no longer pay Class 1 secondary NICs up to the Upper Secondary Threshold for those employees (or 13.8% of earnings above £156 per week and £815 per week).