AJ Bell experts analyse some of the key decisions facing Jeremy Hunt ahead of next week’s Autumn Statement.
This includes the UK economy and the OBR report; ISA reform; advice/guidance boundary reform; new pensions death tax; new rules to abolish the lifetime allowance; state pension triple lock; more details on automatic enrolment expansion; Lifetime ISAs; inheritance tax; personal savings allowance.
UK economy and the OBR report
AJ Bell head of investment analysis Laith Khalaf says: “Jeremy Hunt’s second Autumn Statement takes place against the backdrop of a more stable economic backdrop in the UK than his first, though that’s a pretty low bar to hurdle. The economic forecasts from the OBR promise to be something of a curate’s egg for the Exchequer’s finances. The good news for the Chancellor is that tax revenues are much higher than previously forecast, the bad news is, so are interest rates. That will serve to push up the cost of government borrowing from already uncomfortably high levels.
“The OBR is going to have to revise up its growth forecast for this year. The economy is hardly purring, with growth of 0.5 per cent so far in 2023, but it’s on course for a better showing than the 0.2 per cent shrinkage previously pencilled in by the budget watchdog. It remains to be seen how the OBR sees the economy unfolding in 2024 and beyond, seeing as its prior projection for interest rates was a peak of just 4.3 per cent.
“The reality of tighter monetary conditions will bump up the cost of servicing and issuing government debt, and put downward pressure on economic growth forecasts. Overall it looks like the Chancellor will find some fiscal room opening up in the Autumn Statement, though in reality around £4 billion of any spare cash is probably going to be spent on keeping fuel duty in check, though there are some mutterings that the Chancellor is considering ending the freeze.
“The big question remains what the government decides to do with any windfall it gets from the economy dodging recession this year, in particular, whether any tax cuts are on the cards. The Chancellor may well opt to keep some powder dry for a pre-election splurge in the Budget next March. That might make political sense, but it would be a gamble. Macro-economic currents are capricious, and by the time the Budget rolls around, the Chancellor’s scope for largesse might be scratched out by a few pen strokes from the bean counters at the OBR.”
ISA reform
AJ Bell head of retirement policy Tom Selby says: “Recent reports suggest the chancellor is planning to tweak ISA rules for next year, allowing people to pay money into more than one ISA of each type in a tax year. This change would make it easier for investors to try out different stocks and shares ISA providers, while cash savers could open multiple new ISAs as new deals become available.
“This would be a helpful change but, far more importantly, it potentially paves the way for radical reform of the ISA system to make it much more flexible and customer friendly.
“It is ridiculous investors are currently faced with a choice of six types of ISA when deciding where to invest for the future, with different rules and allowances further clouding the picture.
“Although ISAs have become a recognisable and trusted savings vehicle, complexity and lack of understanding remains one of the biggest barriers to investing. Only half the people in our research could correctly identify the main types of investment ISA and less than a third know the annual ISA allowance is £20,000.
“If the government brings forward a full review of ISAs, this will provide a real opportunity to develop long-term proposals centred around stripping away unnecessary complexity and creating a single, simple ‘One ISA’ product that incorporates the best features of the existing landscape.
“Simplifying ISAs by creating a ‘One ISA’ would make switching far easier, with customers able to hold cash, investments, or both in their account, and move between providers freely, whereas today’s ISA market is essentially divided down the middle between investing and cash savings accounts.”
Advice/guidance boundary reform
Selby says: “Efforts by the government and the FCA to improve the help available to savers and investors through the advice guidance boundary review are extremely welcome. Those efforts appear trained on two key areas – making it easier for regulated advisers to serve investors at lower cost by reviving the concept of ‘simplified advice’ and improving the guidance available to those who either cannot afford advice or prefer to invest on a DIY basis.
“Increasing access to regulated advice is a laudable goal but there is little evidence of demand for simplified advice among the adviser community. Advisers offer an incredibly valuable service to their clients, but the economic reality of providing professional financial advice means offering mass-market, cut-price advice hasn’t been viable.
“While some providers – likely large institutions – may be able to offer simplified advice at scale, this risks shoe-horning consumers into taking advice at additional cost, when in fact many simply require a little help to understand their options.
“The government and regulator will be able to make the biggest difference to the most people by improving the usefulness of guidance available to non-advised investors.
“Existing regulations make it extremely difficult for organisations to offer anything but very generic, non-personal information to non-advised customers. Going beyond this would risk straying into offering regulated advice and leave firms open to Ombudsman complaints. As a result, most firms err on the side of caution and avoid anything that could be misconstrued as financial advice. The Consumer Duty provides an ideal platform to initiate a step-change in thinking here. Creating a simpler, more defined guidance regime could give firms the necessary confidence to deliver more useful, personal communications with the aim of achieving good outcomes for consumers. This should in turn help millions of people make better-informed decisions about their finances. Improved engagement levels should also benefit regulated advisers, as more people build financial resilience, appreciate the complexity of the choices they face and seek professional help to navigate those choices.”
New pensions death tax?
AJ Bell head of policy development Rachel Vahey says: “The decision to scrap the lifetime allowance has the potential to be a hugely positive step in making pensions simpler for millions of people. But the government is in danger of undoing its good work by creating a horribly complex new set of rules savers will be forced to navigate. What’s more, HMRC has also indicated its intention to hit savers with a new pension ‘death tax’ where someone dies before age 75.
“Under current rules, if you die before age 75 your beneficiaries can inherit your defined contribution pension completely tax-free if it is under your lifetime allowance. However, under the new pension tax regime it’s expected all inherited pensions taken as income will be taxed, regardless of what age you die.
“This would be a massive shift in policy, backtracking on flagship reforms introduced by former chancellor George Osborne alongside the pensions freedom changes. Creating a death tax if income is taken makes little sense and may push more beneficiaries to take a lump sum when an income is more suitable for their needs.
“As we wait for the Finance Bill to be published, it is not yet 100 per cent clear exactly how pension assets will be treated on death. This needs to be clarified urgently to allow all pension savers to make informed decisions.”
New rules to abolish the lifetime allowance
Vahey says: “The Finance Bill, expected to be published shortly after the Autumn Statement, will set out new rules to replace the pensions lifetime allowance from April 2024, as well as other changes.
“But in getting rid of one allowance, HMRC wants to introduce brand-new ones to replace it, with a lump sum allowance set at £268,275, and a lump sum and death benefit allowance of £1,073,100. These are extremely complex changes and could have a material impact on some people’s financial decisions.
“The Consumer Duty requires that consumers be given the right information at the right time to allow them to make timely and properly informed decisions. But with the clock ticking down to the expected start date of 6 April 2024, worryingly, we don’t yet fully know what the new rules are.
“This leaves an incredibly short time – just over 90 working days at the most – to let pension savers know of the changes, and to help them understand what it means for their own circumstances. This is a huge challenge.”
State pension triple lock
Selby says: “Provided the government sticks to its triple-lock promise, we should see an inflation-busting 8.5 per cent increase to the state pension from April next year. This bumper rise is thanks to July’s wage growth figure of 8.5 per cent coming in well above September’s 6.7 per cent CPI inflation figure, although it is possible the Treasury will argue NHS bonus payouts inflated July’s earnings and so instead opt for a lower 7.8 per cent figure, which strips out bonuses.
“This would allow the government to claim it has stuck with the triple-lock pledge while saving some cash, although it would be a huge risk with a general election edging ever nearer and inevitably face accusations of a stealth attack on pensioner incomes. If the chancellor wants to deliver a slice of positive news during these straightened times, he may want to use his speech to confirm an 8.5 per cent state pension increase for 2024.
“Next year’s state pension may not necessarily be confirmed at the Autumn Statement, however. If the government does decide to deviate from the triple-lock methodology, it could instead choose to explain the decision in a standalone announcement.”
More details on automatic enrolment expansion?
Selby says: “The government has confirmed its intention to expand flagship automatic enrolment workplace pension reforms in two ways. First, it plans to reduce the minimum qualifying age from 22 to 18 and second, it wants to remove the ‘lower earnings limit’ that applies to minimum contributions. This latter reform would mean minimum contributions are based on your first pound of earnings, boosting the tax relief and employer contributions millions of workplace pension savers benefit from.
“The big challenge in implementing even this minor expansion of auto-enrolment is it will also mean employee contributions increase at a time when household finances are painfully squeezed. Policymakers will hope that with wages increasing, lots of people simply won’t notice and opt-out rates will remain low. However, there is a danger for those struggling to make ends meet, a pension contribution hike will be the straw that breaks the camel’s back and they’ll decide to quit their workplace scheme. Anyone who does this will be re-enrolled into a workplace scheme in three years’ time.
“In reality, there may never be an easy time to increase auto-enrolment contributions. Given most experts agree pension savings levels need to rise significantly beyond current levels, it is vital the government grasps the nettle by setting a clear, ambitious timetable not just to introduce these changes, but to increase contributions over the next decade as well.
“Given the 2017 auto-enrolment review set the timetable for lowering the age limit to 18 and ditching the lower qualifying earnings band at the ‘mid-2020s’, bringing in these reforms in April 2025 – just beyond the general election – would seem logical.”
Lifetime ISAs
AJ Bell head of personal finance Laura Suter says: “Although the backdrop remains daunting, aspiring homeowners may well view a probable end to interest rate hikes and reports of falling asking prices with cautious optimism. For those refreshing their Rightmove alerts and thinking of buying their first home, news of an increase in the LISA property purchase limit would be a welcome boost.
“The property limit for the Lifetime ISA has remained stubbornly at £450,000 since its launch in April 2017. If the Lifetime ISA limit had increased in line with property prices it would sit at more than £560,000 today.
“At the other end of the spectrum, it is inevitable some savers will be struggling and will find they need to dip into their LISA sooner than planned.
“During the pandemic the government reduced the withdrawal charge on Lifetime ISAs from 25 per cent down to 20 per cent, to allow people to access their savings penalty-free if they found their finances squeezed during the crisis. Disappointingly, this was restored to 25 per cent, rather than changed permanently.
“It feels impossible that the government doesn’t view the current cost-of-living crisis in the same way. Reducing the exit fee would be a low-cost move for the government that would help first-time buyers who saved into their Lifetime ISA in good faith but, due to soaring inflation, now need to dip into their savings.”
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