Pensions tax relief and the triple lock have once again been spared by the chancellor, although changes to these costly policies are expected down the line.
In a spend-heavy economic statement, chancellor Rishi Sunak chose not to mention how the government would pay for its VAT and stamp duty cut, among other announcements, in a move which saw the triple lock and tax relief protected.
The triple lock
There was speculation from the industry that the chancellor would look to either scrap or reform the pensions triple lock to remove the earnings link to mitigate any extraordinary rises that may occur as a result of coronavirus and pay off any debts.
Under current rules, the state pension is increased by the triple lock which is the highest of earnings growth, price inflation or 2.5 per cent a year.
As inflation is low at the moment, a mere 0.5 per cent in May, the state pension is likely to be increased by a minimum of 2.5 per cent or earnings growth.
And as a result of the furlough scheme there could be a sharp decline in average earnings this year followed by a quick and full recovery in the next causing a double digit increase in 2022.
Steven Cameron, pensions director at Aegon, said continuing to “blindly” follow this formula as the country moves past coronavirus could “create bizarre results which were never intended and which would fail any test of intergenerational fairness”.
Mr Cameron said: “The chancellor will have to make a call as to whether to suspend the earnings related element, adjust it to smooth out sharp fluctuations or to make a more fundamental change, with some people viewing it as overly generous.
“But after prioritising younger generations in this summer statement, the chancellor will have a careful balancing act to perform to sell changes to state pensions to older generations.”
Pensions tax relief
The chancellor also remained silent on whether he was looking at reforms to the pensions tax relief system.
When paying into a pension savers receive tax relief on any contributions they make and under the current system tax relief is paid at the highest rate of income tax any saver pays.
This system costs the Treasury almost £40bn a year in lost income tax revenue, which could be used to pay off the government's increasing Covid-19 support debt.
Earlier this year (February 10), it was reported that former chancellor Sajid Javd was looking to make the system fairer for those on lower incomes, by cutting high earner's relief to 20 per cent.
There could also be a revival of the old debate around introducing a 30 per cent flat rate of tax relief or turning the system on its head so relief is given at point of withdrawal.
Autumn Budget
It is expected that these policies will not get off so freely in the Autumn Budget with Jon Greer, head of retirement policy at Quilter, claiming that maintaining the triple lock in its current form was “simply not an option”.
