As one year makes way for the new, I thought it a key time to review the current and new arrangements for pensions.
Regulation and context: Pensions are regulated by two bodies: the Pensions Regulator and the Financial Conduct Authority. The first has responsibility for workplace pensions and therefore monitors employer schemes and looks after employee interests; whereas the second has responsibility for contract-based personal pensions and therefore looks after client interests. Both are interested in appropriate governance, organisational behaviour in relation to savers and fund performance. The Pensions Ombudsman Service is free and open to those wishing to complain about issues such as how a pension fund is run. It can be accessed by individuals as well as employers, pension fund trustees and pension scheme managers. The main interest for any prospective pensioner is the size of the ultimate pension pot, this being the value of someone’s retirement funds at the point they choose to retire. Which? states that where an ‘average British wage is about £26,000 – to replicate that in retirement you’d need a pension pot of more than £300,000” (Which.co.uk).
Pension Reform: With awareness that more people are living for longer and that a reduced workforce is paying into the state pension pot, the government has recognised the challenges facing the state pension. In late 2013 they announced the introduction of a single-tier flat-rate State Pension from 6 April 2016 and an increase in State Pension Age to 67 with effect from April 2026. They have sought to invigorate the pensions industry through enabling and encouraging everyone to have access to a pension scheme independent of the state pension scheme. There was clearly a need. Reduced interest rates meant that pensioners’ savings no longer yielded the same income, confidence in annuities was adversely impacted by falling annuity payouts and there had been criticism over the complexity of pension products and some bad practice in terms of charging structures and clarity of guidance provided. These facts, combined with a reported lack of consumer awareness of the nature and value of their pensions or alternative ways to save for their pensions, meant that the time for reform was ripe.
So 2014 was the year when HM Treasury announced ‘greater choice and flexibility’ for individuals and continued a policy of pension reform which included furthering auto-enrolment in workplace schemes. This is where employers have a responsibility to offer and contribute to workplace schemes for employees who meet certain criteria. Other reforms included the introduction of freedom over how pension investors can take their tax-free cash and flexibility over access to entire pension pots from aged 55. From April 2015, pension investors over 55 can take income from their pension pot above the tax-free amount in a variety of ways. They can withdraw it all and invest it in one go or continue to take drawings as and when they like. It should be noted that the age for this will increase to 57 from 2028 although there is a commitment for it always to be 10 years less that the State Retirement Age.
The so-called ‘death tax’ of 55% was abolished in the Autumn with beneficiaries from April 2015 being subject to different tax treatment depending on the age the pension contributor dies. In practice this means that the pension can be passed on either tax-free or subject to marginal income tax, neither option being as hefty as the former 55%. Alternative pension savings via ISAs were also encouraged with the increase of the new cash ISA limit of £15k.
These reforms have meant that by April 2015, individuals face greater access to the tax-free advantages which pensions and particularly employer-contribution workplace schemes provide. They will have greater access to their pension pots and a greater choice over what they do with those pots. Impartial guidance can be accessed through the Pensions Advisory Service and the Citizens Advice Bureau. All pension providers by April 2015 will be required to advise of this impartial service so as to enable individuals to make informed decisions, have greater certainty over the outcomes of those decisions and improve overall consumer confidence in how to plan for their retirement.