Pension Freedoms Scrapped by New Chancellor

Why Philip Hammond is rolling back a number of Osborne pension reforms; the second hand annuity market and triple-lock pension, and the fate of the Lifetime ISA

Emma Simon 14 November, 2016 | 4:00PM
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In the four months since she became Prime Minister, Theresa May and her Chancellor Philip Hammond have quietly ditched a number of key economic policies championed by their predecessors.

Most notably – and within 24 hours of taking office – was the requirement to get the Budget deficit into surplus by end of this Parliament, a central plank of George Osborne’s economic plan.

But Hammond is also rowing back on a number of Osborne’s pension plans, which were part of his bold pension freedom reforms.

From April 2015 investors have been allowed access to their pension funds from the age of 55. This has seen far fewer people buy an annuity at retirement. Instead, more are using income drawdown, or phased capital withdrawals to fund their retirement.

These second stage of this plan was to create a second-hand annuity market, effectively opening up these pension freedoms to those who had retired prior to 2015.

There were clearly teething problems with this second-hand market however. The initial launch date of April 2016 was pushed back a year. But last month Hammond announced it was to be scrapped completely.

No Second-Hand Annuity Market

This was met with mixed reactions. Ros Altmann, pensions minister in the previous Government, said: “Abandoning the secondary annuity market is a big let-down to thousands of people.”

She pointed out that some in poor health, or those had bought annuities they did not need, would miss out on the opportunity to exchange them for a cash lump sum.

She added that this decision seems to have been as a result of “industry lobbying and a lack of preparedness with guidance.”

Others point out a number of pension providers had refused to take part. A less competitive market, plus administration and advice fees may have meant poor value for consumers.

Douglas Anderson, a partner at pension consultancy, Hymans Robertson said: "While some retirees may feel a sense of disappointment as they feel trapped in a product they didn’t want to buy, in reality, getting value for money from cashing in annuities would have been a tall order.”

Tom McPhail, head of policy for Hargreaves Lansdown added: “The second-hand annuity policy was always flawed policy and it is to the new team’s credit that they ditched it.”

Pensions Guidance Watered Down

Hammond also appears to be rowing back on plans to give consumers free guidance on pensions at retirement. Altmann says: “Osborne set up PensionWise. This was a great service and was going to be improved by merging all long-term investment and retirement saving guidance in one place, under the Department of Work and Pensions.

“Unfortunately, the new government has abandoned that plan, and is now talking about merging investment and savings with debt advice, under the auspices of the Treasury. There is no clear commitment to PensionWise or The Pension Advisory Service which I find very worrying.”

Will Hammond Pull Plug On Higher Rate Tax Relief?

McPhail points out that these reforms could signal further changes to the pension and savings landscape, as a Government appears more confident in pursuing its own agenda.

Of key interest will be changes to the way pensions are taxed. McPhail says: “Further pension tax changes are only a matter of time; when, not if. Osborne left unfinished business, which will probably have to be addressed within the term of the current parliament.”

Will Hammond go further than Osborne dared – and propose wholesale reform of pensions tax relief?  He could introduce a flat rate of tax relief, disadvantaging higher earners, or link tax relief to age, so there is more incentive to start pension savings when young. Alternatively, he could ditch upfront tax relief altogether, moving to a system closer to ISAs.

Many though urge Hammond to show restraint on this. Steven Cameron pensions director at Aegon said: “We very much hope the new Government will not pursue any radical reform of pensions tax relief.” A ‘Pension ISA’ would be “hugely disruptive” he said.

The Lifetime ISA, another Osborne initiative, looks set to go ahead from April next year, benefitting the under 40s. But any further blurring of ISAs and pensions will only serve to complicate the savings landscape further, he said, and may result in lower levels of long-term savings overall.

Instead Cameron said he would like to see Hammond focus on “offering savers stability, at least until Brexit is well and truly in place.”

Jon Greer, a pensions and savings expert at Old Mutual Wealth agrees: “While there is evidence many people don’t appreciate how generous pensions are, via upfront tax relief, there is no evidence that an alternative system would be better understood by the public.”

Calls For Higher Lifetime Allowance

However, while both caution against a radical change, they suggest more modest reforms. Cameron would like Hammond to reverse the cuts imposed on the Lifetime Allowance, which brought it down to £1 million. Meanwhile Greer says there is a case for ditching the taper on the annual allowance, which severely restricts how much high earners can save into pensions.

There is speculation that such changes could appear in this month’s Autumn Statement. However McPhail said: “I don’t think we’ll see a lot of substantive pension detail in this Autumn Statement. There may be consultations announced though. I’d look to the Spring Budget for any major pension reform.”

State Pension Set To Fall In Value

This could include changes to the State Pension. There has been speculation the government may be emboldened to unpick the ‘triple lock’ on state pensions. This ensures that the basis state pension retains its spending power, by rising each year by whichever is higher: inflation as measured by CPI, average earnings or 2.5%.

No other state benefits have this future-proofing in place. In recent years most have been uprated by a maximum of 1% a year.  This costly pension guarantee was introduced by Cameron, when he headed the 2010 coalition government. He pledged it would stay in place to at least 2020.

But now MPs on the parliamentary committee for work and pension said it should be scrapped, as it will worsen an economy already heavily skewed towards baby boomers and against millennials.

But McPhail points out that it is not an easy policy to lose: “It is a sure-fire vote loser among an influential segment of the electorate.”

He does not envisage the Government changing this policy before 2020, but expects they may consult on how this guarantee may evolve beyond this date.

It seems likely that any change to the triple lock will be tied up with the outcome of the Cridland Review, due to report next year, which will lay out recommendations for increasing the State Pension age.

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About Author

Emma Simon

Emma Simon  is a financial journalist, specialising in investment and consumer issues, writing for Morningstar.co.uk