Budget 2016: succession barriers

This week’s announcement, and those previously made by the chancellor, of changes coming into effect in the next 13 months further heighten succession problems for law firms. The sector - especially smaller firms - is struggling to retain talent as they wait to succeed their elders.

These problems have been caused by uncertainty and lower valuations expected for the partners’ retirement pots, together with the 2008 financial crisis that the sector is still feeling the effects of and many of the provisions introduced by George Osborne in the last couple of years.

Partners near retirement will in some cases have built up property portfolios that will suffer from 6 April 2017 with the restricting of mortgage interest relief.

They will also be fearful of their ability to draw, tax free, the pension commencement lump sum (PCLS), aka the ‘tax-free lump sum’, from the pensions they have built up (no announcement yesterday, but I believe this will only be a stay of execution), together with their earnings potential in the crucial final years of partnership being hit by government policy affecting the legal profession and the different forms of competition within the sector.

Short-term uncertainty is further exacerbated by a possible Brexit and this will also filter through to the younger generation and their own confidence that partnership is their long-term goal.

Partners earning greater than £150,000 will see their pension contributions restricted from 6 April 2016 and their lifetime allowances now capped at £1m. Whilst these are both very large numbers, many ambitious young lawyers in practice will be aiming for these figures and if this cap is hampering the older generation of partners from tax-efficient retirement planning, then this will again delay the point at which they would feel comfortable sharing some of the overall pie with the younger generation.

Whilst a partnership should, of course, look at its own longevity rather than the needs of the near-retiring partners, this unfortunately does not seem to be the case in the legal sector, where many partners still work well into their 60s and 70s and do not consider, firstly, the problems they are storing up in respect of talent being lost and secondly how they, the next generation, can fund a pay out of their own increasing capital accounts.

Whilst younger partners have been given the opportunity of a lifetime ISA (and a 25% kicker) this £4,000 per annum is not the answer to that generation’s retirement pots either and perhaps signals a further move away from traditional pension contributions and extraction, as I mention above in the ‘stay of execution’ comment.

The fact that a class 2 ‘stamp’ is disappearing may appear good news but when the government suggests it is reforming Class 4 National Insurance, I can see the gap of 3% between Employee’s NI (9%) and the self-employed (12%) being closed very swiftly; a further hit to partners’ disposable income and building their pots.

Whilst I cannot hold George Osborne personally responsible for all of the sector’s succession issues, I do believe that this and previous budgets are not enabling partners to plan and resolve many retirement issues.

In conclusion, unless you are a law firm which needs flood defences, not just to your finances, or a firm that may attract fees from the Northern powerhouse restructuring, or from the transport and infrastructure promised, I see no long-term assistance coming your way any time soon from this budget.

Peter Noyce is head of professional servies at Menzies LLP