NHS staff and other public sector works are likely to be some of the hardest-hit taxpayers this year, according to advisers looking ahead to potential fallout from Chancellor Rishi Sunak’s recent budget.
On 3 March 2021, Chancellor Sunak unveiled his budget to help the UK recover from the Covid-19 pandemic. He kept the Conservative Party pledge to keep income tax rates where they were but introduced a number of ‘stealth tax’ measures to start refilling government funds.
Now, with 6 April 2021 marking the start of a new tax year, advisers are looking ahead to what some of these measures may mean for clients. In particular, the freezing of the pension lifetime allowance (LTA) at £1,073,100 until 2026 has attracted criticism.
Amyr Rocha Lima, partner at Holland Hahn & Wills, says this risks impacting more people with accumulated pension funds at or nearing £1m.
“This, in turn, will increase the number of people who will be affected by lifetime allowance charges, whether in defined contribution pensions, like SIPPs and group pension schemes, or defined benefit schemes, such as the final salary schemes within the public sector,” he says.
“People of working age, currently accruing pension benefits, will count for many of those affected by this policy. However, even those not contributing should bear in mind that a large pension fund can easily breach the lifetime allowance.”
Public sector workers, including NHS staff, will likely be impacted by this change. Dominic Thomas, principal at Solomons IFA, labels this tinkering “unnecessary”.
“I don’t really have any problem with freezing allowances, except for the LTA which is going to create more problems for NHS staff,” he says. “It’s a daft allowance anyway if they are going to continue the AA and Tapered AA, unnecessary. Expecting this government to do much common good seems to run counter to the experience to date.”
People will be caught out as the economy recovers from the pandemic. With spending increasing, inflation will closely follow and therefore catch out more people above the LTA. Sanlam, which works with the NHS pension scheme, has calculated that if CPI returns the expected 2% by the end of the year and remains there on average for the next five years, doctors could be up to £50,000 worse-off in retirement.
“As we exit the pandemic if spending increases and if inflation follows, then the move by the Chancellor will see more individuals breaching the allowance,” says Christopher Beaupin, adviser at Timothy James & Partners.
“This could also have a bearing on how people continue to work if they do not wish to be disadvantaged by the lifetime allowance charge, they may reduce their hours or even retire earlier than they had otherwise planned to. Indeed, those saving into pensions may be reluctant to keep contributing too.”
Of course, this wasn’t the only development from the Treasury, with the living wage being increased from £8.72 to £8.91. This means those working over 22 hours a week will meet the £10,000 minimum earnings threshold for a workplace pension and therefore drawing more people into auto-enrolment.
James Wyman, IFA at Lyndhurst Financial Management, welcomes this as a step that could encourage more people to pay their retirement planning greater attention.
“I am a fan of auto-enrolment as it helps people think about pensions earlier and there is not much they need to do to benefit from it,” he says. “One problem is that many people who are much closer to retirement may have a false sense of security as they just think they are paying into a pension and will have enough to retire on without properly investigating how much they may have.”
At the same time, the state pension is increasing and being re-rated by around £230 a year. This is currently established by the triple lock which means pensions receive an increase of the highest of earnings growth, inflation or 2.5% from April. However, advisers question how long this can continue.
“Triple lock can’t remain,” says Robert Macdonald, financial planner at Succession Wealth.
“Whilst it is a great vote generator for the older generation- many of whom have a reasonable income, those at the bottom of society are penalised with AE.”
Wyman adds: “The state pension forms the cornerstone of retirement income as increases in this means you are likely to put less strain on other souses of income such as an investment portfolio, potentially increasing its longevity.”
ISA and pension allowances
A new tax year also means refreshed ISA and pension allowances. This area of savings did not receive much information from the Treasury and many experts expect structures such as ISAs to be used more, with many households having amassed surplus cash due to restrictions on expenditure during the lockdown. In fact, government figures show in the first three-quarters of 2020 extra household savings hit £148bn.
“It has been well reported on the amount of cash piling up in peoples bank accounts,” remarks Macdonald. “The ISA / pension allowance for the new tax year will get a slice of this but many are simply waiting on holidays opening up to spend some of that money.”
“We seem to be entering a new era for the retail investors as we emerge from the pandemic,” says Hugh Johnson, head of proposition (wealth planning) at Sanlam. “Business activity in Q1 2021 was up 20% vs last year and much of this is driven by people wanting to invest surplus cash accrued under lock-down.
“People are being driven to invest by negligible interest rates coupled with the prospect of rising inflation, a sense of optimism following the success of the vaccination roll-out and a year that forced us all to take pause and reassess our priorities.”