UK budget 2020, what could it mean for your pension?
There were a number of crowd-pleasing highlights from Rishi Sunak’s budget yesterday. Primarily, if you live in the U.K the cost of your booze and petrol will not be going up, at least not thanks to the government anyway. There was also good news for small business’, lower earners and higher earners alike, as a number of proposed changes could see many people keeping more of what they earn.
Another key point, particularly relevant to the expat community is the stamp duty surcharge.
From April 2021 overseas property buyers will have to pay a 2% stamp duty surcharge on residential property in England and Northern Ireland. If the buyer is not intending to live in the property themselves, they will have to pay an additional 3%, bringing their total surcharge to 5% above the standard rate. The money collected from this surcharge will go towards combating homelessness and rough sleeping.
Whilst these areas are generally pretty well covered by the newspapers, there were a few other notable changes worth considering in more detail, particularly with regards to pensions.
The full, new state pension will go up by 3.9% from £168.60 a week to about £175.20 in April. For most pensioners who get the older basic state pension, this is also going up by 3.9%, from £129.20 to £134.25 per week.
With regards to private pensions, the government has launched its consultation on aligning RPI with CPIH. The purpose of the consultation is to seek views on the implementation of the switch and any technical issues it may cause. They are also trying to decide when the best time, between 2025 and 2030, to introduce the reforms would be.
What exactly does this mean?
RPI (Retail price index) is a measure of inflation, based on retail prices. CPIH (Harmonized index of consumer prices) is also a measure of inflation but it measures changes in the prices of goods and services purchased by households for consumption. There are a number of differences between how the two are calculated and what they both consider, but one of the major differences is that RPI includes housing cost such as housing depreciation, road fund license, council tax and mortgage interest payments.
Given the different considerations when calculating the two, the end result will inevitably be different. Typically, RPI is higher by approximately 1%.
The reason this is bad news for defined benefit pension holders is because usually the guaranteed benefits in a DB scheme, are inflation linked using RPI. This means, when the changes come into place the inflation linked growth on defined benefit pension benefits, could decrease according to the difference between RPI and CPIH, or in simple terms, by as much as 1% a year.
Given that typically this impacts the guaranteed benefits in the scheme, it will hit those who accumulated benefits prior to 1997 the hardest.
It is estimated that there are around 10 million defined benefit pension members who would be negatively impacted by this change.
The other major impact of this change would be to the funding levels of the schemes. Whilst a reduction in the amount of benefits they are obliged to pay may seem like a positive for scheme funding, many pension funds purchased index-linked gilts. These government debt instruments would see a decrease in value to those that hold them, that would benefit the government to the tune of up to £120bn. However, the same amount is what those who hold the index-linked guilts would be set to lose out on. So, any benefit the schemes stand to make in the form of reduced obligations, is more than nullified by the dramatic loss in some of their assets value.
The overall outcome from these changes, aside from the inevitable administrative complications, would be an increase in pension scheme deficits and a decrease to members benefits.
On a more positive note, we are expecting to see transfer values yet again hit record highs. 10-year gilt yields are at record lows and interest rates in the U.K have now been brought down to 0.25% in an effort to boost the economy through the coronavirus pandemic. These two factors, critical in the calculations used by schemes when generating a transfer value, could result in the biggest opportunity we have ever seen for expats with UK pensions.
If you have been sitting on the fence with regards to transferring your benefits, or have previously received a value you were not happy with, now is the time to have another look.