The Conservatives’ overall majority at the general election was a surprise to many. From a pensions perspective, we should have at least a degree of consistency with the previous regime. However, it remains to be seen how much will change, particularly now we have a new pensions minister in Ros Altmann.
Despite a desire from many in the industry (including me) for a period of consolidation to let the many recent alterations bed in, it seems inevitable the next five years will lead to more changes to the pensions landscape.
Near the top of the new regime’s priority list will be the continuing rollout of automatic enrolment. While the opt-out rates in the first few years have been impressively low, it will be interesting to see how that alters as smaller and smaller employers are pulled into the system and the contribution rates push up towards the full 8 per cent level.
Once we have all employers auto-enrolling, the next challenge – and it is a big one – is to push the contribution rate up further. A more realistic rate to help many attain reasonable benefits would be at least 12 per cent but it is likely there will be opposition to this, especially from smaller businesses.
Changes to pension tax relief also seem inevitable. In the pre-election glut of new policies, the Conservatives suggested a reduction for those earning more than £150,000.
They proposed gradually reducing the annual allowance of £40,000 so anyone earning £210,000 or more will have an allowance of just £10,000. Payments up to the lower allowance will receive full tax relief (up to 45 per cent) but contributions above this will receive no tax relief. While their manifesto says they will not propose any further changes to pension tax relief during this Parliament, a change such as this is ripe for future nibbling, gradually bringing it down and down the earnings scale.
Looking towards retirement, the lifetime allowance is due to be sliced still further to £1m from April 2016. However, Altmann has previously been vocal in her suggestions there is no need for a lifetime cap at all. It will be interesting to see if her views influence the Government’s forthcoming change.
On the state benefits side, those reaching state pension age after April 2016 will expect a flat-rate amount of around £155 per week. However, many will not receive that from the state as they have previously been contracted-out or have gaps in their National Insurance record.
Another potential development is around the secondary annuity market. In an unusual move, the previous Government launched a consultation that ran over the election period and ends on 18 June.
As the Conservatives have been returned to power with an increased majority, the chances of this proposal becoming law have increased.
Add in the fact the new pensions minister is a huge advocate and it seems likely we will see some form of secondary market.
However, this is far from simple. Any secondary annuity market comes with significant risk of customer detriment. So even if there is a viable competitive market on the buying side, we would need strong customer protection measures to help those selling achieve a reasonable outcome.
These could include forcing people to shop around the market, a blind bidding system and forcing people to take advice if the value of their benefits is above a certain level (perhaps £30,000 to be consistent with the defined benefit transfer position).
That does raise an issue of how people know the approximate value of their income stream so they know in advance whether advice is required or not.
But perhaps, more fundamentally, the question is whether there are sufficient advisers willing to participate in this market. Many I have spoken to would much prefer to give it a swerve.
So the Government faces many difficult challenges over the next few years. It is important to remember we are in the midst of rolling out pension membership to millions of new savers and it is less than two months since the retirement landscape underwent once-in-a-lifetime change. There is still much to do to bed in these big transformations without making more wholesale changes.
Andrew Tully is pensions technical director at Retirement Advantage