Spring Budget: Hunt the Unleaked Items
By Martyn Page, Investment Director, Worldwide Financial Planning
March 16, 2023
AT lunchtime on Wednesday, in a set piece of political theatre, Chancellor Hunt unveiled those few remaining bits of the Budget not already leaked to the media. These included reducing the amount of tax due on a pub pint of draught beer, although supermarkets still retain their tax advantage here. The duty on draught beer is actually paid by the brewers so we need to see how much of this they pass on to publicans. But this is small beer.
The Office for Budget Responsibility (OBR), which provides cover for the Chancellor’s made up fiscal rules, said that the outlook for the economy looking five years ahead was slightly less awful than it had predicted just four months earlier. As you know, we got lucky with a mild winter, so energy prices fell by more than anticipated. The Chancellor spent two-thirds of the £25 billion a year improvement in the fiscal outlook, since November, on his Budget measures.
The OBR never says whether a policy is a good idea, only whether the numbers add up. But the numbers are based around its forecasts – and these are no better (or worse) than others. Thus, when the Chancellor says that the OBR says that the UK will avoid recession, this is largely semantics and should not be taken as gospel.
What is less said is that two completely different forecasts are used to guide policy makers. The OBR is used to set fiscal policy (taxing and spending) while the Bank of England makes its own forecasts to set monetary policy. These views can often be quite different, as we pointed out following the autumn budget statement.
The OBR’s model is partly based on market expectations for interest rates, and these are particularly volatile at present. For example, their latest forecast was made before the collapse of Silicon Valley Bank and the loss of confidence in Credit Suisse which may yet have serious implications for growth and interest rates. The media is happy to run stories about the removal of an image of Matterhorn from a bar of Toblerone but is largely silent on the systemic risk to the entire European banking system if Switzerland’s second largest bank were to fail.
The Budget itself was full of sensible measures to promote economic growth along with supply side measures that, in time, will remove the disincentives to work for those who say they would prefer to work, such as the disabled and mothers of young children. Since these measures have been well covered elsewhere, they won’t be listed here. An obvious way to improve productivity is to get more people working. However, we should remain sceptical of the long-term plans outlined if only because the current government may not be around to see them through.
The unpleasant changes to personal tax rates were already made last autumn. The Chancellor said he was keeping ISA limits unchanged – just to let you know he’d been thinking about whether or not the regime was still too generous.
On the plus side, Chancellor Hunt undid the wilful damage done by two previous Conservative chancellors by abolishing the Lifetime Allowance (LTA) for pensions. This was done under the guise of encouraging doctors back to work. Whether or not it will be enough to tempt retired medics back into the workforce remains to be seen but it might halt the current exodus and avoid an escalating NHS crisis ahead of the next election.
Remember that the original unstated target of the LTA was public sector workers on generous final salary pension schemes. But it was those with perennially less secure defined contribution pension plans who were quicker to grasp what was happening. Those in their late 40s and 50s realised that even if their pots only grew at a modest rate, it was quite likely they would be hit by the LTA ceiling. This realisation would easily dis-incentivise people to save in a pension for retirement at the one time in their lives when they might be able to afford additional contributions (kids gone, decent middle manager salary at last). Was there ever a more counter-productive pensions policy?
The removal of the Lifetime Allowance charge this April (to stem the flow of retiring medics ASAP and reduce the immediate NHS salary bill for locums) and the abolition of the LTA from next April has been welcomed by almost everyone other than the Opposition. Obviously. Some will be encouraged to increase their pension contributions immediately while others might wait.
But do not think that the abolition of the LTA means the Treasury has agreed to underwrite an uncapped amount of associated tax relief on your contributions. It would not be a surprise if the Chancellor were later to impose a lifetime allowance on pension tax relief. This might be mixed in alongside a policy that moves to a flat rate of 30 per cent tax relief for everyone. "Last year we made it easier for people to get back into work and now we want to reward them for staying in work with higher tax relief for the majority, as part of our levelling up agenda,” he might say.
And then there is the matter of the now apparently unfair tax-free lump sum.
By diligently saving into Conservative-inspired defined contribution pension schemes, an entire generation has forgone assured pleasures today for the uncertainty of potential pleasures when they are older. Since then, there has been so much tinkering with pensions (generally for the worse) that some people now believe it is only a matter of time before the 25 per cent tax free lump sum is curtailed. As this is something supported by think tanks on both the left (Rowntree Foundation) and the right (Institute for Fiscal Studies) we cannot dismiss it out of hand, even though it would break the last major long-term contract between the individual and the state.
Although it might sound like an urban myth, the tax-free pension lump sum was apparently designed for British civil servants in India who wanted to retire back home in England. The lump sum was to provide them with the cash needed to buy a bungalow rather than rent. Funnily enough, things haven’t changed that much. There are still many people who have ear-marked their lump sum to pay off the mortgage.
Rather than abolishment (not a vote winner), the Chancellor has sneaked in a lifetime allowance for the tax-free lump sum. This has currently been set well above the level needed to clear a typical outstanding mortgage.
Specifically, the Budget contained a sentence that was the thin end of the wedge for the tax-free lump sum. Although the LTA has been abolished, the maximum pension commencement lump sum has been ‘retained’ at £268,275 and will be frozen thereafter. At best, it has been left to wither on the vine. Those who have already protected their pension some years ago are not affected. Pensions are complex and boring but they do need to be regularly reviewed.
In a knee-jerk reaction of point scoring, the opposition Labour Party immediately stated it would reverse the abolition of the LTA. This is ill thought out because, yet again, it sends a signal that political parties are happy to move the goal posts for short-term gain. That can only unsettle anyone who is prudent and self-disciplined enough to save for a distant eventuality and does not wish to be a burden on the state. All parties need to agree a framework for pension policy so that the public can have the confidence to commit to serious long-term financial planning, rather than, say, punting it all on a giant mortgage – as many people already do.
The UK state pension is not generous, and the entitlement age continues to be pushed back, as it does with private pensions. Given the swingeing tax hikes on unsheltered dividends and capital gains (via curtailment of allowances) coming in the next two tax years, we may yet see people being given further reason to tilt their retirement savings away from boosting pensions as they are nudged towards ISAs – which of course cost the state a lot less than pension tax relief.
ISAs also allow access at any time and may become the vehicle for those who want to retain some control over when and how they might ease into retirement. The Chancellor would like us to believe he is encouraging retired people back into work, but previous government pension meddling has already inadvertently sent a signal to those in their 40s and 50s that early retirement is now more desirous (because it looks increasingly harder to secure). Pushing back pension entitlement ages is also an obvious way to reduce shrinkage of an ageing workforce.
The great Philip Larkin, the best English poet of the past 100 years, wrote two poems about having to work: Toads and Toads Revisited. He was a darkly humorous, pessimistic librarian who had to work Mondays to Saturdays, so he might well complain. The first poem, written when he was 32, compared work to having a giant toad squatting on his back. Whereas in the second poem he realised that the comfortable routine of work was marginally preferable to having nothing to do but wait for death. He wrote that one when he turned 40.
Not many people know there was a later draft of a third poem where, aged 46, he railed in fury about feeling he might never be able to retire. Here are its final lines:
Working ‘till I kick the bucket
F*** IT, F*** IT, F*** IT, F*** IT.
You could be forgiven for wondering whether this aim is now an unstated government policy.
Martyn Page is the Investment Director of Worldwide Financial Planning which is authorised and regulated by the Financial Conduct Authority.
ENDS:
Follow us on Twitter: @WorldwideFP and become a follower of Worldwide Financial Planning on Facebook
Worldwide Financial Planning Ltd are authorised and regulated by the Financial Conduct Authority (FRN: 440668) 'The FCA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.' Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made. All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up. Your home may be repossessed if you do not keep up repayments on your mortgage.
