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Budget 2018 – What does it mean for pension schemes?

Luke Carter

Regulatory Advisor

investigates what the 2018 Budget means for the pensions industry.

30 October 2018

The Budget was announced yesterday. The good (and, in some ways, bad) news for pension schemes is that there was no change to any of the rules around pension savings. The only change to affect all pension savers was the indexation of the Lifetime Allowance to £1,055,000.

Pension Tax Relief is safe for another year. Though the Chancellor has stated that the Spring Statement could be upgraded to a full fiscal event (that is, a Budget) if the Brexit deal warrants this, so we could still face changes next year.

The good news is that Annual Allowances (as complex as they are) have remained the same, avoiding new cliff-edge choices for pension savers, or bringing more savers closer to the cliff edge by cutting them. The bad news is that there are no changes to the Net Pay Anomaly. This means that workers who earn less than the Personal Allowance, and whose pension scheme uses the Net Pay method to grant tax relief to their pension savings, receive no tax relief on their pension contributions.

The Personal Allowance (the amount you earn before paying basic-rate tax) will be raised to £12,500 in April 2019 – a year early. Alongside this, the Higher-Rate Allowance will also be raised to £50,000 at the same time – again, a year early. However, these will be frozen for 2020-2021. While this is good news on the take-home-pay front, it will move more pension savers into the lower tax bracket – a possible precursor of future changes to pension tax relief, by reducing the number of people affected by moving to a flat rate.

For other savings, the ISA Allowance has also remained static at £20,000 and the Junior ISA Allowance is indexed in line with CPI to £4,368. The starting rate of savings income (the amount of income from interest you can earn before paying tax on this) is kept fixed at £5,000.

Other news for pension schemes is the announcement of £5 million in funding in 2019 for the Pensions Dashboard. We need to wait for the DWP Feasibility Study to discover what this is for. Also hidden away is an interesting announcement that:

'The Department for Work and Pensions will consult in 2019 on the function of the Pensions Charge Cap to ensure that it does not unduly restrict the use of performance fees within default pension schemes, while maintaining member protections.'

The current Charge Cap could hit schemes where performance fees are paid, simply by out-performing benchmarks. The actual method for allowing such fees needs to be examined to ensure the Charge Cap cannot be circumvented or manipulated and protect savers.

The Government has announced its response to the pension cold-calling ban, with draft regulations that will be laid before Parliament this Autumn.

For Public Sector pension schemes, the bad news is that the Budget commits the discount rate reduction to 2.4% + CPI, increasing the costs for providing pensions. This is a separate change from the benefit improvements, as a result of the triennial valuations. There will also be a spending review next year, with a commitment to a spending increase of 1.2% per year in real terms, so we will wait to see the impact on Public Sector wages and pensions as a result of this change.

One final policy shift worth noting for the pensions industry is the stated objective for the Government to move to CPIH as its headline measure of inflation. This is a change from the move from RPI to CPI, though the Government will no longer introduce new uses of RPI and work with stakeholders on moving away from this. We await further Government consultation on what this means for pension schemes that increase pensions in line with RPI.

The good news is that there is no big news. While this is disappointing for low earners in a net pay scheme, there are some interesting changes that could herald future changes for pension schemes in future budgets to keep an eye out for. The funding for the Pensions Dashboard is interesting and we look forward to more details in the DWP Feasibility Study in the very near future.

Luke Carter is Regulatory Advisor at Aquila Heywood, the largest supplier of life and pensions administration software solutions in the UK.

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