Duck all speculation and relax

capybara onsen | MYS Design - stock.adobe.com

It’s midwinter, it’s the festive season, you’re expecting an article about capybaras and yuzu fruit, aren’t you? You aren’t? Then read on… In Japan, a country as cold and dark as Scotland in the winter months, there’s a tradition at winter solstice time of comforting rituals such as soaking in hot baths garnished with yuzu fruit, apparently to drive away bad spirits.

In 1982, a keeper at Iza Shaboten Zoo thought some of his charges, the world’s largest semi-aquatic rodents, might enjoy a hot fruit bath too. And so, the tradition of capybara onsen was born. Pictures of them luxuriating in hot springs amongst bobbing fruit have become wildly popular, are remarkably cheering and are said to promote relaxation and wellbeing.

If the thought of soaking in a hot spring at the end of a fraught and stressful year appeals to you too, I don’t blame you. It appears fewer people than ever are confident about their financial position, compounded by the seemingly never-ending speculation about what might and might not happen in November’s Budget.

Once we had the actual facts, we discovered that some of the biggest proposed changes (changes to the tax-free cash rules, 2p on income tax) hadn’t made the final cut. The biggest talking points were around pension planning – in the form of a £2,000 cap on salary sacrifice – and a new limit on saving into cash ISAs of £12,000 a year, down from £20,000.

At The Lang Cat, we asked financial advisers immediately after the Budget what they thought of it. A hefty 76 per cent felt it would adversely affect clients, while 41 per cent believe their firm might benefit, with more people needing help to navigate the changes.

But there was one very clear message from the advice profession, and that’s for meaningful reform. Constantly fiddling around with thresholds and caps in an effort to raise some cash creates uncertainty and makes it harder for clients to plan for the long term. The system is seen as too complex, changeable, and politicised.

The salary sacrifice changes are an example of this. Salary sacrifice for pensions is a way to save for retirement by agreeing to give up part of your salary and having your employer pay that amount into your pension instead. Because your salary is lower, you pay less tax and National Insurance. And your employer will save on the National Insurance they have to pay as well – if you have a benevolent employer, they may pass some or all of that saving on to you.

National Insurance is applied at 15 per cent for employers. For employees, it’s 8 per cent on earnings over £12,570 and 2 per cent on earnings over £50,270, so it’s a saving worth having for both parties. Under the new proposals you’ll still be able to sacrifice up to £2,000 while retaining National Insurance relief, but any contributions beyond that amount won’t qualify for the relief.

Capping the amount you can contribute has an impact in several different ways. When we asked advisers, their view was that a cap of £2,000 a year (or looking at it another way, £167 a month) is too low. There is already a painful shortfall between the amount many people are saving for their retirement and the amount they’ll need to live comfortably.

The UK government’s own figures suggest four in ten people of working age (which amounts to 14.6 million people) are under-saving for retirement. Taking away an incentive to put in more is not going to help close the pensions gap. And anything that puts friction in the system and makes it more complicated is likely to make things worse, not better.

Looking at it from an employer’s and administrator’s point of view, anything that adds complexity to the system costs money, as well as changing the remuneration package on offer to employees – especially as we don’t yet know the fine details of the new rules, which adds a layer of uncertainty.

But before making any decisions on what you might do with your pension savings and banging on the door of your payroll department, there’s one very important point to note in all of this: the rules aren’t due to change until April 2029.

Over the last month or so there has been increasing speculation whether this will actually come into force at all. April 2029 is an awfully long time away in politics. It’s also very likely to be in the middle of the final run-up to the next general election, which has to be held by mid-August that year at the latest.

This is only one of the reasons advisers complain that the taxation of pensions is complex, changeable, and politicised. Could it be tempting for a government keen to be re-elected to do a swift U-turn in search of votes? Might the government take on board the views of consumer advocates who say it’s bad for pension savers, or listen to pension administrators (or, for that matter, HMRC) explaining the full complexity?

There are more than three years of uncertainty for employers and employees in the meantime.

If we’ve learned anything from the last two Budgets, we know it’s a bad idea to make financial decisions based on policy speculation. If this is all making your head hurt, I suggest searching online for pictures of capybaras relaxing in hot tubs (or look at the one at the top of this page). You won’t regret it.