How Budget of the UK Increase Pension Flexibility - Essay Example

Introduction Over the past few decades retirement has become the norm in United Kingdom (UK), whether casually or consequentially, pensions is now considered a major concern. To that extent, the debate on how UK tax policy encourages individuals in the UK to save for their retirements remains multifaceted. As a matter of fact, UK considers pensions as the single largest item of public policy (Béland et al. 2014). However, Blomqvist and Busby (2014) reiterate that there is need to evaluate the extent to which UK pension tax policy and budget 2015 tapering relief, reductions in lifetime allowances and the Lifetime ISAs in the 2016 Budget have contributed to policy change towards UK pension programmes. Analysis of levels of savings in the country in recent years have suggested that there is significant levels of under-saving aimed to benefit citizens upon retirements especially on the part of household and individuals (Lain 2016). While this study recoginises that the problems of under-savings for retirement has been recognized, and possible solutions suggested, there is need to ascertain possible impacts of Lifetime ISAs, budget 2014 increasing pension flexibility and budget 2015 tapering relief, reductions in lifetime allowances across year. The need to evaluate these policy programmes comes as a result of the fact that UK continue to experience an increase in ageing population as was highlighted in the recent reports from Pensions Commissions Report (Treasury 2015). Based on these positions, the aim of this paper is to critically evaluate how current tax policy encourages individuals in the country to save for their retirements. To conceptualise this point, key policies such as Lifetime ISAs, budget 2014 increasing pension flexibility and budget 2015 tapering relief, reductions in lifetime allowances across year will be evaluated. How Budget 2014 Increase Pension Flexibility Beginning with how budget 2014 increases pension flexibility, it can be noted from this policy that Government is committed to removing a number of restrictions with regard to how pensions savers can now draw their benefits from their Defined Contribution (DC) pots after the age of 55 (Chetty 2015). Basically, the implication of this policy is manifold. First, the policy has been liked because it has allowed pension savers a number of flexibility on how they can be able to access their DC pension savings. Recent studies from scholars such as Foster (2017) have argued that the best way in understanding how UK tax policy encourages individuals to save for their retirement is to assess how recent policies allow or restrict members to take their pensions through drawdown. Relating Foster (2017) studies with ways in which budget 2014 has increased pension flexibility, the scheme (policies in budget 2014) now allows members to take their pensions via elaborated drawdown systems. Accordingly, the policy capped drawdown limits was increased from 120 percent to 150 percent of the applicable basis amount. The interpretation of this position is that savers are now guaranteed that there will be having the minimum income requirements for accessing flexible drawdown being decreased from £20,000 to £12,000. This is not to mention the fact that with policies in budget 2014, savers who are likely to qualify for trivial commutation will have figures they are allowed to take as a lump sum now increased from £18,000 to £30,0000 (Searle and Köppe 2014). Studies such as Foster et al. (2014) have noted that the rise of pensioning for retirement is thus emblematic of the growth of people, especially on their economic and social life. But by the same token, studies continue to acknowledge that pensions remains to be at the centre of debate on whether the budget 2014 reform has achieved its goals. To provide an answer to this debate is to look at the impacts of budget 2014 in terms of the number of small pot in UK since. Researches have acknowledged that the small pot has been on increase from £2,000 to £10,000 (Foster et al. 2014; Garcia and Marques 2017). This position means that the number of small personal pension pots such as individual or small group personal pensions pots that individuals or small groups can take as lump sum has been on increase from two to three. However, as it was the case before 27th March 2014, there has not been a restriction on the number of small ports that allows a single member to take from occupation pension schemes. According to Garcia and Marques (2017) the number of persons contributing to a personal pension increased to 8 million in 2014-2015, 2.7 million more than the low of 5.4 million that was registered in 2011 and 2012. Since the self-employed and employees account for 99 percent of the contributions to personal pensions, the statistics above provides guideline how attracted savers by increasing pension flexibility. Recent survey on the benefits of budget 2014 indicated that members of public are currently encouraged to save owing to the fact that the policy (budget 2014) now allows pension savers to withdraw their entire pot, income drawdown product or purchase annuity, or a combination of the two (Garcia and Marques 2017). Other benefits that have been found to attract pension savers is the 25 percent tax free lump sum which would be availed, with the remainder of the money subjected to tax at the pension saver’s marginal rate. As it stands, retiring members of DC unlike before, will have the opportunity of making informed decisions with regard to their pension pot(s). As a matter of fact, latest guidelines from Financial Conduct Authority (FCA) has been in tandem with this policy and has since been working closely with members to enhance transparency and accountability in the implementation of the tenets of budget 2014. Implications of Budget 2015 Pensions Survey that was conducted by the National Association of Pension Funds (NAPF) (French 2017) has indicated that confidence of people on their financial well-being in retirements has been declining markedly as they get old. The results of the survey further indicates that there is regret among ageing members of public as they get closer to their retirement. Evidence-based studies from 2012 Attitudes to Pensions survey agreed with this finding confirming that only a third of the retired people strongly agreed that they ought to have started saving for their retirements as soon as they started employment (French 2017). Relating this argument with budget 2015 which introduced tapering relief and reductions in lifetime allowances across year, the effect of any tax relief is to allow citizens to reduce the cost of buying retirement income. The first implication of budget 2015 is that it substantially increased the amount of money members of public could save in the form of pension. According to Johnson (2016), budget 2015 has necessitated reduction in information risk. Looking at the budget 2015 critically, it surely has little to offer and entice pension savers as it was the case with the previous budgets. When Chancellor George Osborne made the announcement, one of the pronunciations he made was that the lifetime allowance for pension contributions would be reduced from £1.25 million up from £1 million. The question that has been asked by different studies has been the extent to which such reductions were going to implicate UK tax policy and the extent to which individuals in the UK would save for their retirement. From the perspective of studies such as Robbins and Roberts (2015), the changes that were announced by Chancellor George Osborne mean that the maximum amount people wanting to contribute tax effectively into their pension would fall to about £1 million. According to the study, the bottom line of such a move was that it may not encourage members of the public since overpaying the set limit will likely incur about 55 percent tax charge especially when it is taken as lump sum. This view has been supported by Lain (2016) who noted that effectiveness of any regime is measured by the extent to which it can overcome challenges and allow them to be proactive in their decision making especially about their future. Accordingly, the latest pronouncement by Chancellor George Osborne means that these levels of effectiveness may not be realized in UK pensions plans since the move is likely to affect any employee who was having undrawn funds in a UK pension scheme especially where the lifetime savings was expected to exceed the set value before 6th April 2016. Noting that the set limit has been falling by at least 44 percent since 2010, the new developments have not been received well by employees who have been building up a pension pot but with the old limits in their minds. On tapered annual allowance, there is one point that Chancellor George Osborne made clear about the extent to which the policy is encouraging individuals in the UK to save for their retirement. First, this report recognizes that in as much as employees will be affected by the changes with regard to lifetime allowances, they should have a considerable idea regarding their accrued benefits. Wright (2016) interprets this point adding that the introduction of the tapered annual allowance will to some extent, cause complications to people willing to enter into pension schemes. The study noted, “UK citizens who is affected by the process of tapering may to some extent, be blissfully aware of it, since it is really not until the end of the process of taxation year that they will be aware of how much their benefit have accrued” (Wright 2016 p. 47). On the other hand, there has been debate that has now focused on ways in which the taper has been a factor that determines the extent to which citizens are motivated to save for their retirement. The position that Chancellor George Osborne took about taper looks promising for future savers. However, studies have evaluated this position and their findings contradict the position held by Chancellor George Osborne. Taking a case study from Lustig (2016), taper will likely to see higher earners in the country, beginning with those earning at least £150,000 per year, limited to the amount they are able to save tax-free into a pension every year (Lustig 2016; James and Maples 2016). According to this analysis, there is a chance that this will fall from £10,000 to £40,000 especially for those earning £210,000. Thus the ultimate position is that there will be overpaying of this limit which will incur a 45 percent tax charge. The position taken by Wright (2016) further complicates the argument that Chancellor George Osborne took about tapering relief. According to the study, the possible problem for employer is that they are obscured as they may be unaware about the employees that fall into their area/bracket. The total income may not involve bonus but even salary payments and pension contributions, including income from other areas live property income and dividends which employers are not aware about. The best way to understand the position Wright (2016) took is that what Chancellor George Osborne announced will likely to restrict pensions tax relief since it led to the introduction of a tapered reduction with regard to the amount of the annual allowance for people within income which will include the value of pension contributions stretching over £150,000 and who have generated an income (the income excludes pension contributions) that stretches beyond £110,000. Contrariwise, tapering relief has been found to be beneficial and encourages individuals in UK to save for their retirement (Torry 2016). The definition of adjusted income has the ability of adding back any pension contributions so as to prevent contributors from avoiding any restrictions since they will be able to exchange salary for employer contributions. Providing a case study on those contributors in cash balance arrangements or defined benefits, it is apparent that after Chancellor George Osborne pronouncement, the value of any employer’s contribution will be calculated based on annual allowance approach (Torry 2016). Expanding on this point, it is apparent that the employer contribution will be based on pension input figure/amount for the arrangement thus attracting more savers. However, such arrangements will be less the figure of any contributions that were made or that which were based on behalf of the individual during the year of tax. Putting this argument practically, the rate of reduction with regard to annual allowance is currently by £1 for every £2 where there is adjusted income that exceeds £150,000 but with a maximum of up to a maximum reduction of £30,000. This provision provides savers will a leeway to control their savings unlike before. Lifetime ISAs in Budget 2016 References Béland, D., Blomqvist, P., Andersen, J. G., Palme, J., & Waddan, A. (2014). The universal decline of universality? Social policy change in Canada, Denmark, Sweden and the UK. Social Policy & Administration, 48(7), 739-756. Blomqvist, A., & Busby, C. (2014). Paying for the Boomers: Long-Term Care and Intergenerational Equity. Chetty, R. (2015). Behavioral economics and public policy: A pragmatic perspective. The American Economic Review, 105(5), 1-33. Foster, L. (2017). Young people and attitudes towards pension planning. Social Policy and Society, 1-16. Foster, L., Irving, Z., Ramia, G., & Farnsworth, K. (2014). 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