Business

Triple lock lives to fight another day

Chancellor Philip Hammond holding his red ministerial box outside 11 Downing Street, before heading to the House of Commons to deliver his Budget
Chancellor Philip Hammond holding his red ministerial box outside 11 Downing Street, before heading to the House of Commons to deliver his Budget Chancellor Philip Hammond holding his red ministerial box outside 11 Downing Street, before heading to the House of Commons to deliver his Budget

WELL, it was Budget week again last week, and working people have by and large breathed a sigh of relief that no really bad news has come in relation to our pensions.

First of all, the Chancellor Philip Hammond confirmed that the state pension will rise by 3 per cent in April 2018.

Another piece of good news is that the Chancellor did not abolish the ‘Pensions Triple Lock’, which increases the value of the state pension in line with the Consumer Price Index (CPI) rate of inflation, average earnings, or 2.5 per cent, whichever is the higher.

Clearly, this measure to ‘inflation-proof’ the state pension is a major expenditure for government, and with every budget comes the expectation that it’s an expenditure that is eminently disposable.

However, this year, the triple lock has lived to fight another day – and so the inflation rate of 3 per cent in September 2017 dictated how much the pension would rise.

The other piece of good news relates to the annual allowance for saving into your pension without penalty. This is a significant figure for government, as it dictates how much they pay in tax relief on pensions contributions every year, and it has been subject to cuts in the recent past.

Latest figures show the cost of pension tax relief rose by around £3 billion in the last year, while the cost of not levying employer National Insurance contributions on pension contributions rose by a further £2 billion. Despite speculation that it would be cut to £35,000 a year, the annual allowance has not been touched, and for most savers remains at £40,000.

However, the pressure on the government to cut spending next year and in future years is likely to increase, rather than decrease.

There are signs of some relaxation of the public sector pay freeze, which will take a significant bite out of the Chancellor’s flexibility in next year’s budget. Additionally, forecasts of productivity growth are being revised downward, which will also cut into the Chancellor’s tax base.

For all these reasons, it always makes sense to listen to the speculation about what might happen to pensions, because even if cuts don’t come this year, the discussion about what could happen is always a good barometer of what the future might hold.

One person in a good position to speculate is the former pensions minister Steve Webb.

He pointed out this month that one very important insight into the Government’s pensions thinking came through a very unusual and slightly bizarre occurrence.

A Treasury minister was recently seen walking up Downing Street with a sheet of Budget options, which were partially captured on camera. The document suggested that even a flagship policy such as the raising of tax-free personal allowances could be scaled back.

If the Government is prepared to consider significant U-turns of this sort, then it is possible that pension tax relief could also be in its sights in future years.

In other words – anything can happen.

This is why it is prudent not to assume that the state pension will always be as generous as it is today.

This is also why setting up a second strand to your retirement saving makes more sense than ever, perhaps with a workplace pension or by consulting your financial adviser about a personal pension.

This week I’ll leave the last word to Steve Webb, who sums up the likely future of pension saving thus: “The brutal reality is that pension tax relief has always been – and continues to be – a pot to which hard-up chancellors will return for another dip.”

::Michael Kennedy is an independent financial adviser and pensions specialist, and can be contacted on 028 71886005 . Further information can be found on the Facebook page “Kennedy Independent Financial Advice Ltd”.