WHAT might the Chancellor do to address the crisis in our pension system and restore some faith in the value of saving? After five years of rock-bottom interest rates, as the economy is recovering, will this finally be the Budget that restores some hope to savers?
For the past few years, policy has focused on encouraging more borrowing, increasing bank lending and helping mortgage borrowers, in an effort to revive the economy.
Continued ultra-low interest rates and ever-cheaper mortgages have been great news for the one-third of households who have a mortgage, but the other two thirds have hardly benefited. Indeed, these policies have left many older people facing plummeting savings income or feeling forced to take on more risk by investing in stocks and bonds, or both.
Company pension schemes’ deficits have risen sharply as low interest rates have taken their toll and anyone buying an annuity has seen a permanent reduction in their income.
Here are some ideas of what the Chancellor could do to help.
Exempt savings income from tax for the next two years. As interest rates have been kept artificially low, it would be great news for savers if they were allowed to receive their interest income tax-free.
A temporary tax break would cost the Chancellor very little while rates are so low, but would at least give a small boost to savers’ net income.
Relax the restrictions on ISAs. The Chancellor could allow ISA savers to choose whether to put their whole ISA allowance into cash or stocks and shares, and be able to transfer freely between the two.
Young people saving for a house deposit, or retirees needing to live on their savings, cannot afford to gamble on the markets, but then they can only put half the annual ISA allowance into Cash.
Improving ISA flexibility would help offset at least a small part of the damage done by falling savings interest rates, by enabling savers to receive a bit more income tax-free.
Relax the rules for annuity purchase to allow £10,000 or even £18,000 to be taken as a lump sum. The financial services regulator, FCA, recently highlighted what terrible value current annuity purchasers often receive and this applies particularly to smaller pension funds.
Currently, unless total pension savings are worth under £18,000, or an individual pension pot is valued below £2,000, the funds have to be turned into an income, which normally means buying an annuity.
However, annuity companies offer very poor value for smaller annuities and if the Chancellor were to allow funds up to, say, £10,000 or even £18,000, to be taken as a taxable lump sum, people would not have to buy an annuity but could invest the money as they wish to.
This would also bring in more revenue to the Exchequer, since many people who receive only a few extra pounds a week from a small annuity will not pay tax on that income, whereas receiving a lump sum may result in pensioners paying basic rate tax on their fund.
Introduce fairer rules for capped income drawdown – particularly to recognise ill-health. Some form of “enhanced” or “impaired life” drawdown, allowing those with poorer health to withdraw more each year.
Introduce new incentives to help people save for care. The Chancellor could announce new incentives to help people save for later life care needs.
The numbers needing expensive old age care will grow significantly in future and almost nobody is saving to prepare for this.
A new Care ISA allowance would enable people to save in a tax-free environment to provide for long-term care.
If the ISA could be passed on free of inheritance tax if it is not spent on care, then many people might start earmarking their ISA savings for care. Such an incentive would also help focus people’s attention on the need for care savings.
Stop meddling with pension rules. This could allow some stability for people to plan their later life finances.
The last few years have done dreadful damage to savings incentives. No economy can survive and thrive without long-term savings and it is important that policymakers encourage more people to save for their own future needs. Let’s hope this Budget will finally produce some long overdue good news for savers.
Dr Ros Altmann is a pensions expert and former adviser to Tony Blair.