The pensions industry has been hit by a tsunami of regulation over the last few years including auto-enrolment, pension freedoms and changes to the state pension and lifetime and annual allowance. The March 2016 Budget saw the introduction of the controversial Lifetime Isa, along with proposals for a pensions dashboard and a pensions advice allowance. Former Chancellor George Osborne also performed a dramatic U-turn on a radical revamp of the pension tax relief system which would have seen the announcement of either a flat rate or the introduction of a pension Isa. The flat rate idea was met with strong opposition from the business community, savers and some Conservative MPs amid claims it would have amounted to a tax raid disproportionately affecting middle earners.
The latest reversal saw the UK Government cancel plans to create a secondary annuity market. The decision to shelve the secondary annuity market — which was set to be introduced in April 2017 — dismantles one of Osborne’s flagship pension reforms that served as an extension of pension freedoms. The Government, which said it reached the decision “after an extensive programme of engagement with industry, financial regulators and consumer groups,” cited lack of consumer protection as the reason for ditching a plan which would have enabled pensioners to sell their annuities for cash.
The decision will be welcomed by those fearing a secondary annuity market would have posed risks to savers and could even have given rise to the next mis-selling scandal. Others questioned whether pensioners selling their annuities would have got value for money from insurers.
But news of the U-turn will have frustrated some providers who spent time, money and resources readying their systems and preparing for the introduction of a market that was set to launch in just six months. Advocates of the secondary annuity market could also point out the ability to cash in an annuity would have particularly benefited those with small pension pots facing smaller retirement incomes. They will also argue that scrapping the plan is unfair to those who were forced to buy an annuity and are now trapped in products they do not want.
Meanwhile, the Pension Schemes Bill published by the Department for Work and Pensions in October 2016 sets out tough new regulations for master trusts, laying out five criteria they will need to meet.
The Pension Schemes Bill also set in motion the process of introducing a cap on early exit charges for occupational pension scheme members looking to access their pots.
Given this ever-changing and complex pensions landscape, the part played by advisers in explaining the impact of reforms to clients and recommending suitable courses of action will be paramount.
According to FCA data published in April 2016 detailing instances when providers record use of regulated advisers, customer use of advice differs according to product type and pension pot size. The highest levels of advice were found when customers were going into drawdown (68%). And across all products and withdrawals, consumers with larger pots were more likely to have used an adviser, according to the FCA.
Figures published by the TUC in October 2016 make for grim reading. According to the TUC’s analysis, 300,000 savers in DC schemes withdrew cash lump sums without getting financial advice in the first year of pension freedoms which came into effect in April 2015. The TUC also said a further 60,000 people bought annuities without consulting a financial adviser and an additional 11,000 purchased drawdown contracts without seeking advice.
More positively, ABI figures indicate the majority of savers are taking a “sensible” approach in the aftermath of pension freedoms, with 57% of pots seeing withdrawals of just 1% or less in the first quarter of 2016. The ABI added that just 4% of pots saw withdrawals of 10% or more in the three-month period. According to the figures, £4.3 billion was paid out in just over 300,000 cash lump sum payments in the first full year of pension freedoms.
Going forward, more changes could be on the horizon as Theresa May’s Government looks to put its own stamp on the reform agenda and draw a line under the Osborne era. But Chancellor Philip Hammond faces the same pressures as his predecessors — that of an ageing population and the need to strike the right balance between the conflicting demands of incentivising saving and raising much-needed money for the Treasury.
Hammond may well revisit the idea of a flat rate of pension tax relief. With upfront tax relief costing the Treasury billions of pounds a year, this represents an area where the Government could make significant savings. And with many arguing the current system disproportionately benefits higher earners, a flat rate would rebalance incentives to those on lower incomes and fit in with Theresa May’s equality drive.
In a paper published in October 2016, Royal London called for the end of the “salami slicing on tax relief.” It said a pension pot valued at the current maximum of £1 million can buy an annuity of around £45,000 at age 65. According to Royal London, this represents a decline of about two thirds over the last decade as falling tax limits and annuity rates combine to eat into the value of pension pots, creating a “huge restriction on the standard of living” for retirees.
There has been speculation Philip Hammond could use the Autumn Statement on 23 November 2016 to overhaul pension tax relief. Certain quarters of the industry have called on the Government to examine tax relief, with AJ Bell recently asking it to establish an independent commission to review the issue.
The Government is also reported to be considering a proposal from Hargreaves Lansdown under which pension tax relief would be abolished and replaced with an age-based system. The idea, whereby the Government would pay £1 minus a person’s age for every £1 paid into a pension plan, would see the young receive the biggest top-ups and could be presented as part of an effort to foster a savings culture among younger people.
On the one hand, Hammond may take the view that the pensions system has been tinkered with too much and decide to leave alone. On the other hand, the Government may feel the need to raise additional funds to help steady the ship after the Brexit vote and pension tax relief would be a prime target. Ultimately, the Government’s need to both reduce pressure on the public purse and encourage more people to save for retirement means pension tax relief reform will likely be on the table at some stage.
But despite speculation about a possible announcement in the Autumn Statement, any changes may be some time off. The Government recently said feedback to its 2015 consultation on pension tax relief demonstrated a lack of consensus for reform and, as such, it would not be making any major reforms to the system at present.
And when one throws into the mix the fact that auto-enrolment is still being rolled out and Brexit negotiations are taking up much of the Government’s time and energy, a revamp of pension tax relief may have to wait.
The Government could, however, make changes to the lifetime or annual allowance that would hit high earners the hardest and fit into its fairness agenda.
Elsewhere the Lifetime Isa, announced in the March 2016 Budget, has proved to be a controversial offering. One of ex-Chancellor George Osborne’s flagship savings schemes, the Lisa is set to launch in April 2017 despite earlier calls from providers for a one year delay as they sought clarification on design details and argued they had not been given enough time to prepare for the product. The Treasury released more details on the Lisa in September 2016, including clarification that the bonus will be paid monthly from the 2018/19 tax year. But savers may be left with a limited choice of providers as companies struggle to ready their systems in time for launch.
The Lisa will offer those aged between 18 and 40 a Government bonus of 25% on savings up to £4,000 a year. Investors can withdraw funds to purchase a first home worth up to £450,000 or take out all the savings tax-free after reaching age 60.
Despite the Lisa being generally well received in the immediate aftermath of its unveiling, it has since come in for criticism by high-profile figures including former pensions ministers Ros Altmann and Steve Webb. A key area of concern is that it will accelerate a shift in the retirement landscape away from pensions and toward Isas. The Lisa was announced in a Budget that was widely expected to introduce either a pension Isa or an overhaul of pension tax relief.
Another concern is that people desperate to buy a first home will focus their energies on saving into a Lisa and sacrifice the benefits of employer contributions and tax relief that come with workplace pensions.
Such concerns have been stoked by a report published by employee benefits consultancy Capita which found more than a third of young employees would rather save into a Lisa than a pension in findings that would appear to undermine auto-enrolment.
There have been calls for the Government to simplify the Isa system into one product. The Isa has evolved into different products over the last few years and the perils of this constant rebranding were brought into sharp focus by the travails facing the Lisa’s cousin — the Help to Buy Isa. It recently emerged that a little-known restriction in the small print of the Help to Buy Isa scheme means first-time buyers will not be able to use the product for an initial deposit because the 25% bonus is only paid upon completion of a property sale.
Given these calls for product simplification, speculation that critical illness, redundancy or children’s education might be attached to the Lisa as additional lifetime events seems unlikely.
This CoreData Research report is based on a sample of 612 advisers surveyed during October 2016.