Coronavirus bill: Rishi Sunak is already signalling that as soon as a Covid recovery dawns, he will be looking to raise cash
The Chancellor could pose a big risk to the finances of pension savers and retirees in 2021.
Rishi Sunak is already signalling that as soon as a Covid recovery dawns, he will be looking to raise cash to meet the gargantuan cost of getting the country through the pandemic.
The Government has run up a huge bill to fight Covid-19, and borrowed heavily to cover it.
That could mean the ‘triple lock’, guaranteeing annual rises of at least 2.5 per cent in the state pension, is on the block.
Rumours of cuts to pension tax breaks for better off savers have also surfaced again.
But standing against this, an increasingly popular economic idea questions the obsession with deficits.
It holds that countries which issue their own currency – like ours – shouldn’t worry about them unless inflation gets out of control.
This may be gaining traction among central bank thinkers – and even perhaps with the next US administration – but Sunak appears to be a traditionalist.
While the threat of a raid on savers and existing pensioners still lies in the future, the pandemic will continue to wreak havoc on personal finances until enough people are vaccinated for an economic recovery to get under way.
More people are tapping their pensions earlier than they might have done to pay everyday bills – and at great risk of scams, if they are not yet 55.
Markets rallied at the end of 2020 and have started 2021 on the front foot but upsets are likely to continue, and the full consequences of Brexit with the UK’s deal are not yet known.
We delve into these issues and others in greater depth below. It’s worth finding out more about these pension matters and how they might alter your plans for old age. Here’s what you need to know.
1. Pension investments: Covid recovery and Brexit fallout
Relief over a Brexit deal and hope that a mass vaccination programme will end the Covid-19 nightmare triggered a stock market rally at the end of 2020.
What about Brexit? Find out what it means for your money below
But UK markets are still well under their levels at this time last year, though US and German indices have racked up new records.
‘Home bias’, the tendency to favour domestic markets, means most pension savers and retirees might be invested more heavily in the UK than overseas.
But many workers are in ‘default’ pension funds – those employers put you in if you make no active decisions – which have racked up gains because they are either global trackers or well-diversified in overseas markets.
So depending where your pension pot is invested, either via your employer or by you, many savers will have experienced a volatile but far from disastrous year – at least when considering this particular aspect of their situation, and not to dismiss in any way the tragedy of the pandemic.
In 2021, investing experts believe the lifting of Brexit uncertainty will boost UK markets, which remain cheap and therefore attractive to bargain hunters, while the Covid recovery is expected to have a huge stimulus effect.
How do stock market moves affect YOUR pension?
Many pension savers depend on stock market investments, though to different degrees according to your age and where your savings are stashed.
Younger people who are still investing for retirement can ride out periods of underperformance, and pick up shares on the cheap.
Older workers getting close to stopping work, and retirees who invested their pots in income drawdown schemes after the pension freedom reforms in 2015, have more to worry about. We look at how to protect your retirement income in troubled times here.
Those already drawing a final salary pension get guaranteed payouts and can ignore market turbulence, as can those who bought an annuity offering similarly guaranteed payments for life.
Anyone with a final salary pension who is yet to retire should also be fine, as long as the employer meant to fund it doesn’t go out of business.
Even then, the Pension Protection Fund will save most of your money.
But for those yet to retire who would like to buy an annuity, rates remain at rock bottom and will stay there unless interest rates start to recover.
2. Triple lock: Paying the bill for the pandemic
State pensioners could be tapped up by the Chancellor to help pay the bill for combating the coronavirus pandemic.
The future of the ‘triple lock’ that guarantees annual state pension increases of at least 2.5 per cent has already reportedly caused a difference of opinion between Sunak and Boris Johnson.
The Prime Minister is thought to have resisted breaking a manifesto promise in the 2019 election to maintain the perk.
He will want to avoid a backlash among elderly voters. But the issue is likely to remain under debate, within and outside the Government.
One thinktank even suggested last year that it’s ‘not too much to ask’ the elderly to give up the triple lock after the sacrifices society has made for them in the pandemic.
This went down badly with pensioners, who have not only borne the greatest risk and the brunt of deaths from Covid-19, but have paid contributions for their state pension throughout their working lives.
However, there are other, practical issues that might cause the Government to change the triple lock rules, temporarily at least, either this year or in 2022.
The guarantee means annual state pension rises are decided by whatever is the highest of price inflation, average earnings growth or 2.5 per cent.
As a result, there will be 2.5 per cent increase next April, raising the new state pension to £179.60 and the old basic rate to £137.65.
A big correction in pay levels after the Covid-19 crisis – of, say, a fifth according to one official estimate – could lead to a shock spike in the state pension.
This would be hard to justify to another set of voters, the workers who have suffered financial hardship and mounting job losses during the pandemic.
Financial pressures: More people are tapping their pensions earlier than they might have done to pay everyday bills
3. Pension tax relief: Another option to raise cash
Speculation about a raid on pension tax breaks for higher earners has been rife for years.
The move would be unpopular, causing an outcry among better-off savers, and also has practical complications due to the way different pension schemes work.
But the Government might decide that clawing billions of pounds from people’s future retirement savings is worth the risk, and can be done under cover of having to pay the bill for the Covid crisis.
Pensions tax relief allows everyone to save for retirement out of untaxed income, which means you get a bigger sweetener the more you earn.
The rebate is based on people’s income tax rates of 20 per cent, 40 per cent or 45 per cent, which tilts the system in favour of the better-off because they pay more tax.
We explain the pros and cons, and fairness or otherwise of the existing system and any revamp in detail here.
Reform would probably mean the creation of a ‘flat rate’, which at its stingiest would mean the top-up was set at 20 per cent for everyone, raising an estimated £10billion for the Government.
It’s worth noting that usually just ahead of Budgets, rumours of a pension overhaul have led to a big rush of money going into pots.
And that’s landed the Treasury with a temporary but large extra tax relief bill – even though the Government’s mooted money-raising reforms have never actually materialised to offset this cost.
A major problem with hacking back pension tax relief comes from salary sacrifice – a popular way of running company pensions – which would potentially have to be removed to ensure a level playing field.
What you need to know about pensions after Brexit
British expats in the European Union will continue to get annual increases in the state pension, plus healthcare rights.
That also covers those living in Switzerland, and countries which are in the European Economic Area but not the EU – Iceland, Liechtenstein and Norway.
When it comes to private pensions and other financial services, the Association of British Insurers says of the Brexit deal: ‘While this agreement doesn’t directly cover the insurance and wider financial services industry, it provides a good foundation for positive future cooperation with our European neighbours.
‘We hope that this will also allow for outstanding issues to be resolved quickly.’
The ABI says the industry has done ‘everything possible’ to prepare for Brexit, including transferring insurance contracts and establishing EU subsidiaries and branches to minimise disruption to customers.
Expats should contact firms directly if they are concerned.
For those living in the UK who have a pension or insurance product from an EU or EEA based firm, Government guidance is that your coverage should not change.
>>>Read more here about what Brexit will mean for your money
4. Accessing pensions early: Fraud and other risks
There are serious dangers to accessing pension before you are 55 due to the huge tax penalties and scam risks, except in very special circumstances such as terminal illness.
But the pandemic has put many younger savers under financial pressure, and our pensions columnist Steve Webb has received a steady stream of questions from those desperate to raise cash from their pensions.
This trend is sadly likely to continue in 2021, and although readers who contact Steve receive a link to this column and strong words of warning to deter them from a catastrophic blunder, others out there must be falling into this trap.
Just to be clear, we know of no legitimate companies that will help you access your pension before you are 55.
If you come across one that does, it is likely to be a scammer out to steal your savings.
And even if you have lost your entire pension to fraud, you will still be on the hook to the taxman for huge extra sums as well, leaving you in a much worse financial hole.
Many over-55s are starting to take sums out of their pensions sooner than they might have planned too due to redundancy or supporting other family members in the pandemic.
And although they don’t face the same type of heavy tax penalty for making withdrawals, there are pitfalls to watch out for before taking this otherwise normal step, which you could miss if you are in haste to raise cash.
STEVE WEBB ANSWERS YOUR PENSION QUESTIONS
For example, if you take any amount over and above your 25 per cent tax free lump sum, you are only able to put away £4,000 a year and still automatically qualify for tax relief from then onward.
Tom Selby, of AJ Bell, explains how over-55s who start to make withdrawals can avoid unnecessary losses and big tax bills here.
5. Final salary pensions: More employers will go bust
The pandemic has seen the demise of a series of businesses, many of them with final salary schemes that have needed a bailout to save workers’ pensions.
Perhaps the most high profile collapse so far is TopShop owner Arcadia, which had a £350million pension black hole.
We looked at what this would mean for its pensioners here, and the system works roughly the same in all cases.
Workers are rescued by the Pension Protection Fund at the last resort.
Unfortunately, more huge business failures are likely in 2021 amid the chaos and disruption of the pandemic.
But the PPF, which is bankrolled by employers not taxpayers, is well funded.
Meanwhile, employers with sufficient resources are turning to insurers to ‘buy out’ their pension schemes. This is expensive, but it gets them off their books.
It means the larger insurance firms are likely to be shouldering the responsibility of more workers’ final salary pensions going forward.
TOP SIPPS FOR DIY PENSION INVESTORS
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