It’s fair to say that the Chancellor’s recent Budget announcements on the UK’s pension regime, and in particular the removal of the lifetime allowance, generated a huge amount of press coverage.

While a change to the lifetime allowance was widely expected, its complete removal was a surprise to all. With the move, the government has focused on its core benefit of preventing NHS GPs and Consultants from leaving the overstretched health service. It will also help to encourage other, more experienced employees to continue in work.

Following the government’s announcement, the opposition immediately responded by stating it would reintroduce the lifetime allowance if in power, albeit with special exemptions for NHS doctors. Labour’s position is not unexpected as it sees the allowance’s removal as a giveaway to the rich and goes against its well-established policies to redistribute tax savings.

The arguments will no doubt continue until well after the next general election. However, at a stroke, the Conservatives have taken away much of the complexity around pension savings. In addition to the immediate benefit to those who were exceeding the lifetime allowance, there’s potentially a positive, longer-term benefit for society following the Chancellor’s Budget.

Complexity versus simplicity and good consumer outcomes

Successive UK governments have, over the years, overseen an increasingly complex pension system. It’s got to the point where individuals saving for their retirement in good faith are being unintentionally caught out by the rules.

The current regime is the result of Pensions Simplification, introduced by the Labour government in 2006 and designed to encourage greater confidence in the UK’s pension system. Since then, as is the case with tweaks made to legislation, each change in isolation has merit but the consequence over time is unnecessary complexity - and it’s driven a lack of public trust and engagement in pensions.

With Labour’s focus on redistributing tax savings, if the party does win power at the next general election, it’s far from certain it would look to reintroduce complexity into the system with a lifetime allowance and potentially new protections. With the next election just over18 months away, the opposition has the time to determine any changes it wants to make to the pension regime, if it wins power, to spread tax savings across a wider section of society while maintaining simplicity and confidence in the system.

For any UK government in the future, simplicity and good outcomes for consumers at retirement are likely to be key policy objectives for pensions. As I see it, over the longer term, the industry may be pleasantly surprised at how aligned all political parties are on policy. There are many levers all parties could pull to redistribute tax benefits without creating complexity. It’s far more constructive to use the opportunity of being in government to continue to encourage simplicity in retirement savings than introduce more change that could lead to a lack of confidence.

Advisers need confidence for financial planning

Saving for retirement is a long-term commitment and as an industry supporting long-term savings, advisers are on the front line seeking to give clients confidence.

Confidence in future planning is as important as good client outcomes.

So, for advisers, while there may be obvious immediate benefits following the Chancellor’s Budget for some clients, perhaps the biggest long-term benefit of the pension rule changes will be a greater willingness from all to save for the future - and that has to be a good outcome.

The key message can return to one of simplicity and that saving for retirement is a good idea which should have a far-reaching, positive impact on all clients, not just the wealthiest.

Of course, advisers can only work with what they know. And there’s the risk that the Labour party, if in power following the next general election, does reintroduce the lifetime allowance in some form.

No-one can say that won’t happen, but advisers should consider: 

• common practice is to base advice on what advisers know, not what may be; planning for, what could end up being, the wrong advice if predicted changes don’t happen
• no UK political party is likely to want to introduce unnecessary complexity into the pension system. We can expect future governments to change pension policy, but they are likely to look at the system holistically to determine the outcomes they want
• historically, successive UK governments have not applied retrospective change to pension policy penalising actions to date. That’s been true of all political parties that have been in power.

Bigger benefit for all saving for retirement

Change to the pension rules to reduce complexity was inevitable at some point. It was just earlier and more sweeping than most of us expected.

Whether the Chancellor’s Budget prevents NHS Consultants and other highly-skilled individuals from leaving the workplace remains to be seen. If workers have already decided to retire, the government’s intervention may not make much of a difference. However, if people were thinking about retiring because they were going to be hit by pension tax charges, the Conservatives have removed a reason to leave the workforce.

More and more people saving for their retirement have in fact been affected by the lifetime allowance as the limit has dropped to such a level that it will impact many mid-level managers and not just the wealthy. And without inflation linking, the lifetime allowance was going to affect even more savers year after year.

It’s why I firmly believe the biggest long-term benefit for society following the Spring Budget is the simplifying of the UK’s pension regime and the confidence this gives people about their retirement savings. And whichever political party is in power in two years’ time, I would expect its pension policies to build on this and not risk undermining it.

Take a look at Techzone for more details on the removal of the lifetime allowance.

The views expressed in this blog should not be regarded as financial advice.