Words by Sat Singh, CEO of Contractor Financials
The first thing anyone in the pension industry would like to see is stability. There has been an awful lot of change of recent years and there is talk that this area could be looked at in even more detail. I think advisers, providers and clients would like a period of time to let things settle.
However, a green paper on pension tax relief reform, which ended on September 30th, may bring further changes to the industry. Given that the Government is looking at every angle possible to save money, pension tax relief seems a very easy target.
"There’s talk that the Government will move pensions into an ISA style retirement product, which would mean no tax relief up front, but income would be tax free."
Other options could be to just introduce a flat rate of relief for all contributions, which could lead to a 20 to 30% level for all. It may also be the case that no changes are made at all, but I think it is likely that they will look to reduce the tax bill somewhere in the process.
Changing to an ISA based regime could have huge implications for the pension market, both pre and post retirement. We could then be looking at a two tier pension market where all previous benefits would be safeguarded but still subject to tax.
It could be that a one-off tax charge could be applied to all current holdings instead, thus, in turn, reducing everyone’s overall pension fund – not such good news for contractors looking to retire in the near future.
Contractors using both umbrella and Ltd company arrangements therefore wouldn’t potentially be able to benefit from any salary exchange pension contributions they make, or receive corporation tax relief if funded from their company.
Although I would like to see a rise in the Annual Allowance, given the current review I just can’t see this happening at all.
"Big change could be on the horizon though and I’m not convinced at this stage this will benefit retirees over the longer term."
When it comes to mortgages, for aspiring buy to let landlords, the best outcome from the Autumn Statement would be no further adjustments to tax relief on mortgage-backed property. The Chancellor’s revision to relief, as presented in the July Budget, has already affected the value in investing in property for the average landlord.
The frustration for many is that the revision was dressed-up as a method to support would-be first time buyers, by taxing asset rich professional landlords. However, the change in taxation has penalised landlords on the lower end of the scale, as opposed to their cash-rich counterparts.
This is pretty much down to the fact that borrowers looking to improve their retirement portfolio with one or two buy to let properties will require the use of mortgage funding and will therefore benefit from the ability to deduct mortgage interest from their rental income. Professional landlords, most of whom do not have mortgage debt to consider, are relatively un-touched by the revision.
Sadly, the impact of this change will prompt many landlords to increase rents, to cover the costs they now face to make their investment feasible. Perversely, this will have force the rental prices up for the exact demographic that the chancellor claims to be supporting, while reducing the ability of first time buyers to save for that all important deposit.
It’s not unreasonable for many small portfolio owners to feel persecuted for looking to improve their future prospects. UK Inflation remains well below the levels required for a rate increase and the international economic outlook remains weak, so it may be no surprise to hear that the Bank of England has confirmed this week that estimates for interest rate rises will need to be revised.
"It now seems likely that a quarter two/quarter three 2016 target needs to be considered as the most likely point for an increase."
As such, savings rates remain low, while property prices continue to rise, further reducing the prospects for new home owners to come to market.
In summary, backing rather than attacking landlords would be refreshing to see!