The government should ensure that any pension changes in the Budget make it "easier for people to do the right thing", Hargreaves Lansdown has said, warning against cuts to the pension Lifetime Allowance (LTA) and Annual Allowance (AA).
The firm explained that a cut to the LTA would reduce the government’s tax relief bill and could be expected to bring little backlash, as the majority of savers assume that the £1,073,100 limit would only affect the very wealthiest.
However, Hargreaves Lansdown personal finance analyst, Sara Coles, clarified that “this isn’t a vast sum of money in pension terms", warning that public sector workers in particular could "easily run up against the lifetime limit without thinking of themselves as particularly wealthy".
"It’s also the kind of retrospective taxation that makes it nigh-on impossible to do the right thing for retirement," she said.
A cut to the pension AA could also prove problematic, as Coles warned that whilst this could again save a chunk of tax relief for the government, savers would lose out on “vital” flexibility, which is particularly valuable for those who have had changeable income or need to make up for lost time.
“Business owners, for example, may end up neglecting their pension during their working life, because they put everything into the business and plan to retire on the proceeds of selling up," she said. "Cutting how much of this they can put into their pension at that point could be a real blow.”
Coles continued: "The government has been left with an enormous amount of debt after record peace-time government spending to tide us over during the crisis.
"There’s going to be a temptation to use this Budget to find alternative ways to spend less, and there’s a risk that in the process it could put more barriers in the way of people doing the right thing, by saving and investing for their future.
"Instead, changes in the Budget should make it easier for people to do the right thing."
This was echoed by Hargreaves Lansdown senior pensions and retirement analyst, Helen Morrissey, who argued that "pension changes in the budget should make it easier for people to do the right thing".
In particular, Morrissey suggested that the Money Purchase Annual Allowance (MPAA) should be replaced with anti-recycling rules, which tax the contribution as an annual allowance excess, but only when someone has accessed their pension with the express intent to recycle the cash.
“If there’s no intent to recycle, people can rebuild their pension savings and therefore their financial resilience," she said.
Concerns have previously been raised over the impact of the MPAA on savers, with industry experts calling for the allowance to be scrapped after research revealed that two-fifths of those aged over 55 and working are unaware of the restrictions.
Morrissey has also urged the government to reconsider the proposed increase in the normal minimum pension age, warning that this “could act as a barrier to people consolidating small pots and stop them doing the right thing”.
“We could see people making retirement decisions based on retaining the ability to draw their pension from the age of 55 rather than what is in their best long-term interests,” she continued.
“It could also distort the market in favour of those providers who currently have a minimum age of 55 written into their rules. Overall, these changes bring extra complexity and cost for very little benefit.”
Credit - Sophie Smith - Pensions Age - https://www.pensionsage.com/pa/Budget-changes-should-encourage-savers-to-do-the-right-thing.php