A recent Treasury report looking at household savings has sparked calls from MPs to introduce a flat-rate pension tax relief and scrap the pension lifetime allowance as well as a number of other measures. This is a complex issue with potential ramifications for pensions, as many people are struggling to plan successfully for their retirement. As well as looking at ways to bring more self-employed people into the auto-enrolment pension system, the Government is fully committed to finding better ways to incentivise savers. In this article, we look at some of the main points arising from this report…
Treasury report findings
Since the financial crisis, in many ways, household finances have improved. However, many people are still facing economic challenges and a number of households are still struggling with debt, a lack of savings and insufficient pensions. In the HM Treasury report, there is an acknowledgement of this situation and a commitment by the government to try and help people become more financially resilient. It was agreed that people are still having great difficulty when it comes to managing credit and paying bills. It was also agreed that high-cost credit products are still a great cause for concern, which includes high overdraft fees.
What about flat-rate pension tax relief?
Many economists are suggesting that one approach would be to introduce a flat rate of pension tax relief, as well as changing the lifetime allowance to a lower annual allowance. This could prevent people from worrying about the tax implications of good investment returns. It is thought that a flat rate of tax relief may encourage people to save more into their pensions, but others suggest this is not enough of an incentive. Scrapping the lifetime allowance would be welcomed by those affected, but it will make little difference to most savers. Ultimately, the main objective of the government is to change people’s attitudes to saving. We welcome this approach – our advice would be to look at your pensions and savings strategy as early as you can in life, so you can safely plan ahead for the future.
Consultations between the Single Financial Guidance Body (SFGB) and the Government concluded that the FCA should consider increasing the level of guidance before people access their pension pots. Since the pension freedoms, rules around pension income have become more flexible, pension scams have been on the increase, and there has been a sharp decline in demand for annuities. However, early spending of pension income increases the level of risk, especially when people have not been correctly advised.
Always seek professional pension advice before you consider drawing any income from your pension. It is important to understand whether you have enough pension savings to last you through your retirement. Your retirement planning should reflect your goals, both now and in the future, and should include a mix of pensions and a strong savings strategy.
The end of the LISA?
There has also been strong criticism of the Lifetime ISA, which was set up to help people under the age of 40 save towards their retirement. Many people feel that penalties for early withdrawal of funds were not made clear enough and the product appears to be as complex as a pension scheme.
“This inquiry has received strong criticism of the Lifetime Isa over its complexity, its perverse incentives, its lack of complementarity with the pensions saving landscape and its apparent lack of popularity with the industry and pension savers. The government should abolish it.”
HM Treasury Report – Household finances: income, saving and debt
Whenever you choose a savings product, it is important to check the terms with an experienced and qualified financial planner. There are many savings products on the market, and some will be more suitable than others for your individual situation. The most important factor is that you have a robust financial plan that looks at all your savings, pensions and investments. This should be balanced with your attitude to risk, and the approach should be tailored not only to your current lifestyle but the future lifestyle you would like to lead.
When did you last consider your retirement planning? If you would like a review of your pensions, savings and investments strategy, then please get in touch and speak to our financial planning team.