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Pre-budget speculation is always fun. Before every economic update for the last decade, the world of personal finance has swirled with speculation about cuts to pension tax relief.
Sometimes it happens, sometimes it doesn’t. The speculation is the only constant even if it takes different shapes and sizes every year.
This year the madness reached fever-pitch as there was an actual consultation underway which started in the last budget. Newspapers were full of possible scenarios and how much people would lose or gain in each situation. Who’s up and who’s down?
For example, on February 21 former pensions minister Steve Webb said the tax-free lump sum “could be on the brink of extinction”.
Webb was referring to the possibility of a so-called pensions Isa. This was a reform option on the table at the time and it would create a radical step-change in how people save for retirement or any other part of their life.
Webb’s completely unfounded speculation made the front pages of national newspapers and provoked many articles on the personal finance pages.
Some asked whether you should take your tax-free cash now while you had the chance. Others suggested you should pile into pensions right now in order to benefit from tax relief while you can.
It wasn’t just the lump sum. Salary sacrifice was under threat, the lifetime allowance could have been cut again and higher earners were expecting brutal cuts to the benefits they currently enjoy.
As it happened, a toxic combination of backbench Tory MP rebels and a knife-edge EU referendum combined to scupper any significant reform to tax relief on the March 16 budget.
This is normal for budgets. There is speculation by politicians, companies, campaigners and journalists about what the Chancellor might do.
The government may leak some details of its plans to test public and political reaction before officially going ahead.
It’s not just pensions. In recent years we have seen reports of Treasury officials discussing the creation of new lifetime allowances for Isas or changing stamp duty. Changes that would have a large and immediate financial impact on many clients. Sometimes it happens, sometimes it doesn’t.
It is a minefield to understand what is real and what is political positioning, expectation management or simply PR for companies.
As a journalist, I love it. Speculation creates great headlines, interesting debate and fresh ideas about how to improve saving or rebalance budgets. All the stuff a policy nerd like me can get their teeth into.
But what about advisers? Obviously it is all very good for business. Nothing brings clients to the door faster than massive speculation about pension changes and how to avoid losing cash or benefits.
Yet do you advise clients on press speculation or do you simply ignore it all and wait for the budget?
When an authoritative figure such as Steve Webb warns about the loss of the lump sum then it would surely be irresponsible not to advise clients to act?
But when the only basis for that advice is the current Royal London head of communications, a company that benefits significantly from savers piling into pensions, should you take it with a pinch of salt?
Clients may feel that advisers have a hotline to the Treasury and be able to unpick the scary headlines for them but they don’t.
The truth is that advisers are just as clueless about what will be in the budget as the other companies, journalists and politicians speculating.
All they can do is make judgment calls about what might happen and which way the political winds are blowing but when should it be the basis for financial advice?
“Press speculation, if it is purely speculation, should be ignored,” says IFA David Penney, of Penny, Ruddy and Winter. “Every year for as long as I can remember, I have had to persuade some clients to ignore the tax free cash speculation and keep their pension uncrystallised.
“It happened quite a few times this year, thanks to Steve Webb. However, if the Treasury and the Chancellor himself announce that pension tax relief is being “reviewed” and you have respected journalists with reliable contacts within the Treasury reporting that something is likely to happen, then you have to take a view.”
Penney says an example of respectable news reports is the consultation to reform tax relief and the impact on higher earners.
“I was convinced that higher rate relief would be impacted by the Budget,” he said. “I cannot ignore that. If I genuinely believe a change is going to happen that will negatively impact my clients if no action is taken, I would not feel comfortable assuming it is pure speculation.
“If I did, clients would be asking me why I didn’t react. But I must say I think this is the first time in the past nine years since I have been an IFA that I have given advice in anticipation of a Budget change. Normally it is just speculation.”
It’s a tough call to make and advisers can take the blame of the credit for their calls in the run up to the budget. Reading the political and media environment is a crucial tool in an advisers’ armoury.