Successive chancellors have chipped away at pensions in the UK budget, with change after change being imposed on savers and retirees. More often than not there has been little room for discussion or debate with the industry. Whilst on one hand no change is a good thing, on the other some were hoping for an easing of previous measures and a little relief for those who have been hit year after year. This budget was much more localised with promises of new housing, elimination of stamp duty for younger house buyers, and the usual tinkering around the edges of business taxation.
The only real surprise was the additional £3bn for the Brexit budget to help the country deal with the inevitable uncertainty it will bring. The Chancellor used the word ‘uncertainty’ as code for the period between now and Brexit and beyond.
Although it might seem a fairly trifling issue, I was also struck by the down-grading of expected UK GDP from 2% p.a. to 1.5% p.a. Almost every budget I’ve seen from Chancellors of both main parties seem to use the default 2% p.a. expected GDP increases when setting spending plans. Similarly, almost every time growth underperforms expectations. This is important, as failing to achieve GDP growth means that more has to be borrowed in order to fill the hole. My only concern here is that growth may well be less than 1.5% p.a. If productivity remains so low, borrowing forecasts will have to be revised.
Lifetime Allowance is spared
On pensions, it was feared that higher rate tax relief on contributions would be ditched in favour of a flat rate. This did not happen. As such, that particular incentive to save for retirement is still there. No further reductions in the Lifetime Allowance is also good news, although any Chancellor would rightly be accused of taking the proverbial if it is reduced any further. However, the planned inflation increase was confirmed; the LTA limit will therefore be £1,030,000 from tax year 2018/19.
Something I was hoping for was a rethink on the Overseas Tax Charge (OTC). Whilst I can fully understand closing a loophole that allowed tax exempt funds to be received tax free in retirement by people living in low or zero tax locations, very few people actually do this. It does seem anomalous that anyone retiring in the USA where there is a long-standing Dual Tax Treaty with the UK, is treated differently to others who retire in an EEA country where the same conditions apply. Overseas pension transfers to EEA countries are outside the remit of the OTC whereas transfers to QROPS outside the EEA attract a penal 25% charge on transfer. There are ways around this problem, but it still feels like a low-hanging fruit tax grab!
Back to Brexit
One of the main concerns for UK retirees in the EU and Eurozone is the future value of Sterling against the Euro. No one wants a cut in their income simply due to exchange rate fluctuations. My view is that there are three distinct scenarios depending on how you see the UK economy performing in the pre and post-Brexit world:
- In the first instance, you may believe that Sterling will recover as the leave voters are proven right about the economic benefits of being independent. This would mean Sterling gradually appreciating against the Euro (or US$) and your pension rising in value as a result. Beware those downgraded GDP figures though.
- Another option would be not to take the risk of a bad Brexit and convert to Euros now. This is easy to do, although might involve transferring to a QROPS or International SIPP (Self-Invested Personal Pension). Currency risk, and therefore any risk to the value of your pension would be eliminated, however it might be painful to watch if Sterling does recover. A bad Brexit though, would almost inevitably adversely affect the value of Sterling globally.
- Lastly, you may prefer to wait and see what happens. Actions you might take if you were to decide on this route would be to spread your currency risk, perhaps into Sterling, Euros and Dollars. This is a ‘swings and roundabouts’ option whereby weakness in one currency would translate into strength in the others.
Whether planning your pension or investment strategy (or both), the currency issue is going to be almost as important as markets you choose to invest in and should not be underestimated in terms of how it may affect your overall wealth and financial planning.