Chancellor George Osbornes Budget has received a mixed reaction in many quarters, with pensions experts welcoming the lack of major tax relief changes, but concern over the impact that an end to age-related tax allowances will have on pensioners.
Plans to automatically review the State Pension Age to take into account changes in longevity have attracted considerable interest, with many eager to see the details of how this will operate when they are published in the summer.
Proposals to introduce a single state pension drew a generally positive response, although some questioned the impact it would have on employers paying into defined benefit pension schemes.
STATE PENSION AGE REVIEW
John Ball, head of UK pensions at Towers Watson, said: 'All sorts of lifestyle trends and medical developments could affect future improvements in longevity, so how the Government goes about making its educated guess will make a big difference to the outcome.
'Potentially an even bigger question is precisely what the Government wants to achieve when it says the State Pension Age will take changes to life expectancy "into account". According to official population projections, the increases to 66 and 67 that have already been announced will mean that men spend an average of 21.4 years in retirement and women 23.9 years. If ministers want to keep this constant going forward and rely on the ONS projections, the State Pension Age would rise to 68 by about 2036.
'However, they could decide that extra years of life should mean more years in retirement as well as more in work. At the other extreme, they could justify a sharper increase if they wanted to take more account of improvements to longevity that have already taken place.'
Joseph Lu, Legal & General's longevity expert, said: 'The UK's policy on state retirement age hasn't caught up with the trend that we are living longer. For example over the last 60 years, according to the Office of National Statistics, a 65 year-old male will have seen their life expectancy rise by about 10 years, so potentially living 22 years in retirement to age 87.
'The retirement age for men has been 65 since it was set in 1948, when the life expectancy at age 65 was about 12 years. But if the pension state age was set today, on the same life expectancy basis as in 1948 than it would be 77.
'Although the details on how the government will use life expectancy as a measure, are still unclear based on life expectancy trend for the last 20 years' we could expect to see state retirement age increase by a year, every five years in the next decade.'
In a statement, the National Institute of Economic and Social Research said: 'The announcement of a commitment to linking future increases in the State Pension age to increases in longevity is a welcome development.
'The long-term sustainability of the public finances is not addressed by simply closing the structural budget deficit. It is addressed by ensuring we can fund the future demands on public spending associated with an ageing population. This development is a step in that direction. Research at NIESR suggests that a one year increase in working life could improve the government's budget balance by around 0.5% of GDP, 10 years after implementation.'
In a statement, Hargreaves Lansdown Pensions said: 'Given the welcome improvements in longevity over recent decades, this move makes sense, however this will present challenges for pensions which are linked to state pension age, such as final salary schemes and defined contribution pensions with automated lifestyle investment strategies.
'This will put more emphasis on the need for individuals to engage with their retirement planning and to manage their retirement savings in response to changing circumstances and their changing needs.
''In 1981 there 2,900 centenarians in the UK; today there are around 12,000 and by 2033 it is projected there will be 80,000. It is expected that 10 million people alive in the UK today will live to the age of 100.'
Association of Consulting Actuaries chair Stuart Southall said he hoped the move to adjust the state pension age in line with longevity increases would have an impact on private sector pensions.
'For a number of years, the ACA has called for legislative reforms in the private sector that would allow employers to easily adjust pension ages as longevity improves without having to close good existing schemes.
'It is to be hoped the Pension Minister's reinvigoration initiative (for workplace pensions) will address this issue in the next few months and we look forward to inputting to government on how the longevity index will work. Private employers should not suffer tougher rules than those enjoyed by the State in such matters.'
PENSIONS TAX RELIEF
Rory Murphy of Broadstone said: 'For the first time in five Budgets the pensions industry can breathe a collective sigh of relief as the Chancellor leaves pensions tax relief (after much speculation) well alone.
'This is great news for a pensions industry that has had to deal with major upheaval since, so called, pensions simplification back in 2006.'
Hargreaves Lansdown Pensions said: 'An entirely sensible decision to leave pensions tax breaks alone. In this year of auto-enrolment more than any other, it would have been madness to discourage engagement with retirement planning.
'The impending cut in income tax rates presents higher earners with a window of opportunity to obtain pension tax relief at 50% before the rate is cut. They should fill their Hunter wellies with tax relief while they still can. '
Fraser Smart, managing director of Buck Consultants Ltd, said: 'All of the ideas floated over the past few weeks for raising more money from pensions would have been disastrous for pensions and a genuine disincentive to save. However, the Government is going to have to do a lot more before it meets its key promise to reinvigorate occupational pensions.
'We would have liked to see a positive statement from the Treasury of support for pensions, and an undertaking to leave tax reliefs alone for at least a minimum period to reverse some of the damage done by the recent speculation that they sparked and encouraged. '
Dr Deborah Cooper of Mercer said: 'We welcome the retention of the £50,000 annual allowance for pension savings; stability in the pensions market after a sustained period of change is desirable.
'However, we noted that the Chancellor did say that there would be no changes to it in this budget. We hope to see the annual allowance increased in future budgets.'
MOVE TO A SINGLE STATE PENSION
John Ball, head of UK Pensions at Towers Watson said: 'When it first suggested this reform, the Government indicated that people would earn the maximum entitlement to the new single-tier State Pension after just 30 years of working or doing things like bringing up children or caring for sick relatives.
'It's hard to reconcile that with the message that higher life expectancy means working longer. The new system is not supposed to cost more overall, so it is likely to deliver smaller pensions for people who work for 45 years or so and bigger pensions for people with shorter careers. However, it will take some time for this impact to be felt in full.
'Abolishing the State Second Pension means abolishing contracted-out rebates for defined benefit pension schemes. These schemes will no longer be able to replace part of the State Pension as well as just topping it up. Employers' national insurance rebates can be worth up to £1,172 per employee in 2012/13. Employers will have to choose whether to swallow additional costs, redesign their schemes or simply close them to existing members. Closure is likely to be a common response.
'Employees in defined benefit schemes could also have to pay higher National Insurance contributions because they will no longer be giving up future State benefits. Most of these employees work in the public sector. Employee rebates are worth up to £483 in 2012/13.'
Rory Murphy of Broadstone said: 'The go ahead on the "citizen's pension" means that contracting out will finally end, which will create an opportunity for defined benefit pension schemes to review the benefits. For those Trustees running contracted out arrangements they will need to consider how their schemes react to this change.'
'While some will gain under the citizen's pension proposals a significant minority will lose out yet again. At a Broadstone Budget lunch event the view was strongly expressed that the Chancellor should examine steps to compensate the losers, for example those with full national insurance records and a history of full employment.'
Tim Jones, chief executive of the National Employment Savings Trust, said: 'The introduction of the flat rate state pension makes pensions simpler and more straight forward. NEST therefore welcomes the Minister's decision, which makes the benefits of saving clearer.'
CHILD BENEFIT CHANGES
Rob Thomas, associate at Barnett Waddingham, said: 'Removing child benefit in 2013 may have unintended consequences through creating a "sweet spot" for some high earners who wish to make pension contributions via salary sacrifice.
'For example, a person earning £62,000 paying a personal gross contribution of £5,000 per year on a non-salary sacrifice basis loses child benefit.
'Meanwhile, if the same person were to sacrifice £5,000 of salary to have a reduced salary of £57,000, they would retain some of their child benefit and their employer pays a pension contribution of £5,000 into the individual's pension plan. The individual also has a very tiny increase in take home pay due to NI savings and the employer is happy because of the savings he makes on the amount of sacrificed contribution.
'People earning between £50,000 to £60,000 should also consider payment of pension contributions via salary sacrifice as the child benefit reduces by 1% for each £100 earned above £50,000 until it is completely gone for people earning £60,000 or more.'
END OF AGE-RELATED ALLOWANCES
Dr Ros Altmann, director-general of Saga said: 'This is an outrageous assault on decent middle-class pensioners.This Budget contains an enormous stealth tax for older people. Over the next five years, pensioners with an income of between £10,000 and £24,000 will be paying an extra £3 billion in tax while richer pensioners are left unaffected.
'There is nothing in this Budget for savers, there is nothing to improve the annuity market, nothing to appease the damage of quantitative easing and nothing to support ISA changes and shelter older people's money in cash. This Budget is terrible news for pensioners.
'It is good to hear that we will be able to harness the power of pension funds to improve UK Infrastructure but in short, this Budget is another shocking example of the Government's attack on poorer and older people. It is dramatically unfair.'
Nigel Roth, senior partner and tax specialist at Mercer, said: 'With phasing out of the age-related annual allowances those still in work will find that when they come to retire, they are paying more of their pensions in income tax. In contrast, those who were born before 1948, or have already retired, will have their allowances retained.'
John Ball, head of UK pensions at Towers Watson, said: "The extra tax allowance is clawed back for pensioners with incomes above £24,000. As the Office for Tax Simplification recently highlighted, this creates an effective 30% tax rate on income between £24,000 and around £29,000. Removing this feature of the tax system could make pension saving a little more attractive for people who expect to have relatively high incomes in retirement.'
Hargreaves Lansdown Pensions said in a statement: 'The scrapping of the age related allowance makes sense in the context of the rapid increase in the personal allowance. The age related allowance is means tested and as a consequence it is somewhat inefficient. It is a shame therefore that this policy is being introduced in such a way as to penalise some pensioners, with a resulting gain to the exchequer of £3.3 billion over the next five years.'
Association of Consulting Actuaries chair Stuart Southall said: 'Putting an end to age allowances seems to have undermined the overall Budget package and it is to be hoped the Chancellor will reconsider this approach in next year's Budget when, hopefully, signs of economic growth are more positive.
'As a minimum, he should think again during the passage of this year's Finance Bill and look to maintain the current age 65 allowance for those approaching retirement until the personal allowance for all is raised to at least the same level (£10,500).
'Tax simplification is often talked about but rarely delivered and Government should not ignore the fact that many of today's pensioners have suffered considerable hardship (in the form of massively more expensive annuities and negative real returns on their modest savings) because of corrective monetary policies arising from Government and personal over-borrowing of which they were not the cause.'
WHAT IT MEANS FOR PENSION FUNDS
Nick Spencer, director of consulting & advisory services at Russell Investments, said:'Whilst there were some headline changes around tax, tax allowances and retirement ages, there was very little for pension funds in today's Budget. The focus on low interest rates and modest growth projections suggests that pension funds should be prepared that interest rates may stay low for some time.
'This means that trustees need to refocus on their growth portfolio and the ways to generate returns. The better growth portfolios will be extending the sources of their returns both in the range of manager strategies and the flexibility and dynamism of assets chosen.'
THE ROYAL MAIL PENSION FUND
Association of Consulting Actuaries chair Stuart Southall said: 'Whilst we can understand why the Government is "nationalising" the Royal Mail pension fund, the strategy of moving the liabilities off-balance sheet and "snatching the cash" thereby effectively passing on the substantial pension costs to be met by future generations of taxpayers is not one that should be seen as good practice. It's an all too familiar approach echoing why our public finances are in the state they are.
'More puzzling to the private sector, will be why the Government should be allowed an effective "recovery period" to meet the £10bn deficit it has taken on from the Royal Mail of around 50 years. Private sector sponsors of pension schemes must wonder why the regulatory regime they are subject to is so much tougher - after all, many look more financially prudent than HM Government'
IMPACT ON INSURANCE SECTOR
Colin Graham, UK insurance tax leader at PricewaterhouseCoopers, said the Budget's announcement of further cuts to corporation tax would be good news for attracting and retaining global insurance firms to the UK.
He added: 'The Chancellor referenced the progress that has been made on the controlled foreign companies (CFC) reform debate and the fact more firms are moving to the UK. We wouldn't be surprised to see more announcements of insurers' intention to move to the UK in the coming 12 months.
'The need for certainty for business over tax cost cannot be understated and the only nervousness is around the introduction of a General Anti Avoidance Rule (GAAR). There is a difficult balance to strike here - the need to protect tax revenues but also enable businesses to execute commercially driven transactions with certainty.
He added: 'The reduction of the higher income tax rate will also help the UK and its good news for life insurers that pensions relief is largely being left untouched.'
