Autumn Statement measures for pensions and savings
Summary of Autumn Statement measures relating to pensions and savings
by Dr. Ros Altmann
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People will be allowed to buy extra state pension: People will be allowed to buy extra state pension with introduction of Class 3A National Insurance. There are no details yet, but the plan is that those who reach state pension age before the new flat-rate state pension is introduced in April 2016. Existing pensioners as well as those reaching state pension age soon, will be able to buy more state pension in the form of extra State Second Pension rights, to top up their entitlements. This will allow the self-employed and many women without much state pension, to increase their weekly income. The Government says that the cost of buying each extra £1 per week of state pension will be actuarially neutral. Currently, purchasing extra state pension rights can be done on very favourable terms, but the new National Insurance Class 3A contributions will be more expensive than under the current rules. Those who have some private pension, perhaps who trivially commute their pension rights but do want to buy extra lifetime pension, can use their money, or money from other sources, to buy an index-linked extra pension that also covers their partner. This is likely to be much better value than using money to buy a standard annuity, which has no inflation or spouse protection and may offer very poor value.
State pension age will rise further and faster: The State pension age seems set to rise further and faster than previously proposed. The Chancellor announced that the Government expects state pension age to rise faster than currently planned, in order to achieve the aim that one third of adult life should be spent in retirement. As life expectancy keeps rising, this will require an increase in state pension age. The Chancellor suggested this would probably mean the state pension age will reach 68 by 2038, rather than 2048 as is presently planned, so people in their forties will have a pension age of around 68, and further increases in state pension age to 69 by 2048 would mean people in their 30s now will not reach state pension age until they are 69. The actual timetable for any future rises will be determined by reports from the Government Actuary’s Department and an independent commission that is going to be established after the next election, whose recommendations then have to be ratified by Parliament in primary legislation.
State Pension to rise to £113-10pw: Basic State Pension to go up by £2-95 a week from £110.15 to £113.10pw. The Government will increase the Basic State Pension by 2.7% from April 2014, reflecting the increase in cpi. There is a promise that the triple lock on state pensions will remain in place until at least 2015.
No bad news for savers – no really good news either: Despite the last few years of low interest rates, there was really no good news for savers. Perhaps the good news is that there was no bad news. Fears of a lifetime cap on ISAs have thankfully not materialised, and the annual ISA allowance will increase in line with inflation, rising to £11,880 a year (half of which can be in Cash ISAs). The Junior ISA/Child Trust Fund limits will increase to £3,840. but the Government failed to announce that the closed Child Trust Fund scheme could be merged into Junior ISAs. It seems clear that the Chancellor does not expect to encourage saving in future either, since the forecasts in the Autumn Statement documents predict that the savings ratio will fall sharply in coming years, from 6.8% in 2012, down to 4.3% by 2018. It is particularly disappointing that no new incentives to save for social care were announced, for example an extra ISA allowance for social care. National Savings and Investments will be allowed to bring in an extra £2bn-£3.5bn income as the Government can benefit from funding its borrowing cheaper via NS&I than by using the gilt market. As gilt yields have increased, the low interest rates on National Savings are attractive to the Treasury. Indeed, the OBR forecasts that average gilt yields will increase sharply in coming years, having been 1.6% in 2012, they are expected to rise to 4.2% by 2018.
No new changes to pension, drawdown or annuity rules: It is welcome news that the Chancellor did not announce further reductions in the generosity of pension allowances. The plans to cut pension allowances have remained in place, with the annual contribution limit falling to £40,000 (from £50,000 now) and the lifetime limit to £1m (from £1.25m at the moment) after April 2014. It is a shame, although was not really expected, that there have been no changes to improve the value and flexibility of income drawdown rules, or annuities.
Autumn Statement forecasts for savings ratio, gilt yields and house prices:
|
Year |
Savings ratio |
Gilt yields |
House prices |
|
2012 |
6.8% |
1.6% |
+1.6% |
|
2013 |
5.7% |
2.6% |
+3.2% |
|
2014 |
5.0% |
3.0% |
+5.2% |
|
2015 |
4.6% |
3.4% |
+7.2% |
|
2016 |
4.6% |
3.7% |
+4.8% |
|
2017 |
4.4% |
4.0% |
+3.7% |
|
2018 |
4.3% |
4.2% |
+3.8% |