Advisers are being warned to brace themselves for another year of disruptive pensions policy which could see the idea of long-term savings turned on its head.
Reform of pension tax relief is thought to be “almost inevitable” as the Government looks for substantial cost savings against the backdrop of Brexit negotiations and the potential impact on the UK’s growth prospects.
The influence of former chancellor George Osborne will continue to be felt on pensions with the rollout of the Lifetime Isa, as the pensions industry reiterates its concerns about the threat this product poses to traditional pension saving.
There are also major challenges to tackle on the scope of auto-enrolment, and addressing the growing need to widen access to retirement advice.
Hargreaves Lansdown head of retirement policy Tom McPhail says: “It’s going to be a pretty uncertain year. It’s a case of the unknown unknowns: first there is the destabilising factor of Brexit, and the extent to which that will dominate the Government’s agenda. Then you’ve got Mifid II, the Financial Advice Market Review and the asset management market study.
“These are all big pieces of work, any of which could significantly disrupt companies’ business models. They have the potential to be a force for good, but they are disruptors as well and you have to be mindful of how they could change things.”
Twice the opportunity
Changing the way pensions are taxed has long been on the political agenda, and providers and commentators are expecting the issue to gain momentum in 2017.
McPhail says: “It is almost inevitable the Treasury is going to revisit pension taxation. There’s a high probability this will happen this year. We have got two Budgets, we’re going to be in the teeth of Brexit, and we know the Treasury has got unfinished business there. It’s more likely there will be change than not.”
Cicero Group executive chairman Iain Anderson says Chancellor Philip Hammond is not the kind of person to “tinker” with pensions in the same way as Osborne or Gordon Brown. But he admits the size of the potential savings from reforming tax relief will be attractive (the Treasury has previously estimated pension tax relief cost the Government a total of nearly £50bn in 2013/14).
Anderson says: “Predicting any movement on pension tax relief has become something of a fool’s errand. We know the work has already been done, and the Government looked at it and then chickened out. But we also know this is not just about pensions. If you create a flat rate it will have potentially huge fiscal benefits for the Government, and also it fits with the Theresa May mantra of a Government that works for everyone, rather than just those at the top.”
Standard Life head of pensions strategy Jamie Jenkins points out Hammond already signalled an appetite for change in the Autumn Statement in November, with the announcement that the money purchase annual allowance would come down from £10,000 to £4,000 this April.
He says: “All the issues that gave rise to the first pension tax relief consultation are still there. Hammond is clearly concerned about the cost otherwise he wouldn’t have reduced the MPAA. He made several clear statements in the Budget documents about the concerns over the increases in costs. The complexity of managing the existing system within budget is increasing all the time with the changes that are being made around the fringes.”
Hammond’s first Autumn Statement was also his last, opting instead for a Spring Budget and Autumn Budget this year, then from 2018 reverting to an Autumn Budget.
Jenkins says the likely triggering of Article 50 and ongoing Brexit negotiations will undoubtedly influence the content of the two Budgets this year, but they still present two opportunities for reform. He adds: “Tax relief still seems like an awful big target for the Government.”
Osborne chose to steer clear of tax relief reform last year, despite leaning towards the taxed-exempt-exempt, or “pension Isa”, model of taxation. Instead, we saw the announcement of the Lifetime Isa, thought by many to be the precursor to wider changes on pension tax relief.
Advisers, providers and trade bodies remain concerned about the product, which is due to launch in April. Savers can pay in up to £4,000 a year, with a 25 per cent Government bonus on contributions. Funds can be used to buy a first home worth up to £450,000, or can be accessed from age 60 or in the event of terminal illness.
Withdrawals for any other purpose will attract a 25 per cent penalty charge.
Former pensions minister Baroness Ros Altmann is worried about the impact the Lifetime Isa will have, and argues it will encourage savers to spend down their pension pot too early.
Altmann says: “Pensions face an existential threat, with some parts of the Government apparently wanting to turn them into Isas instead. This would be a disaster for future generations and for future governments. During 2017, there is an opportunity for everyone involved in pensions to do as much as possible to help the public understand the benefits of pension saving – we need a widespread public promotion campaign for pensions.
“There is a real threat to pensions from Lifetime Isas. Anyone who cares about pensions needs to be very worried about this.”
AJ Bell chief executive Andy Bell agrees, and believes the Lifetime Isa poses a high risk of creating a future misselling scandal.
He says: “The Lifetime Isa will pose a major challenge for advisers and for the industry. The Government has thrown a total curveball here. Advisers will have to consider whether an Isa, a Lifetime Isa or pension is the most appropriate vehicle for long-term savings. I predict there will be a misselling review before the Lifetime Isa reaches its tenth birthday. Which is the most appropriate savings vehicle will be quite easy to determine, with the benefit of 20/20 hindsight. Without this superpower, it will be a difficult judgement call.”
Shift in thinking
At the same time as the rollout of the Lifetime Isa, the Government will also be pursuing a review of another flagship initiative: auto-enrolment. The Department for Work and Pensions will examine how to bring the self-employed into pension saving, and those with multiple jobs.
Royal London pensions specialist Fiona Tait says if the Government can tackle the issue of who is eligible to be auto-enrolled, the review has the potential to make a big difference to pension saving.
She says the self-employed and those with more than one job represent a particular challenge because it is harder to default people into saving.
But she notes the review demonstrates how the debate around auto-enrolment has moved on.
She says: “It indicates a massive change in attitude. When auto-enrolment was first rolled out, everyone was concentrating on making sure nobody who shouldn’t be saving should be put in. What we seem to be getting now is at the other end of the scale, in that anybody who isn’t putting in is losing out. It reflects a change in direction which shows how successful the initiative has been so far.
“But there is truth to the argument that the more successful auto-enrolment is, the greater the impact on the Treasury’s finances, and that can have a knock-on impact on wider pensions policy.”
Aegon UK pensions director Steven Cameron says although the review will not lead to change this year, it remains hugely important.
Cameron says: “The single biggest development going through 2017 will be the review of auto-enrolment. The most fundamental change the Government could make is finding a way of delivering equivalent auto-enrolment benefits for the self-employed and the ‘gig’ economy.
“That is a huge undertaking but the current Government’s pension policy is unsustainable when you look at the divisions that have been created between employees and those in non-traditional working patterns, which is a growing trend.”
Advice and guidance
Advice and guidance on pensions is set to remain on the agenda as the
Financial Advice Market Review continues its work to make advice more accessible, and the Government’s new guidance body begins to take shape.
Tait says: “On pensions, the direction of travel is away from paternalism and towards freedom and choice, which is a good thing, but people need to be equipped to deal with that.”
Tait argues there is a growing need for a service for those unable to access a full advice service.
She says: “There will be many advisers who will continue doing what they’re doing and for whom FAMR will make no difference, because they offer a full, in-depth, face-to-face advice service. But we need something else for people who have been auto-enrolled, and those coming up to retirement, with services that are less comprehensive for those that cannot afford the
McPhail says better engagement in pensions overall remains the biggest hurdle.
He says: “There is still an unanswered challenge for the industry in how it demonstrates to the mass of consumers that it can make their lives better by making it simple for them to save and invest in their future. In pockets we do that very well, but whether it is pension taxation, auto-enrolment, charges, or governance, there are still too many complex areas which leads people to stick their money in a bank account, buy a property or just not bother with pensions altogether. That remains the big challenge for our industry – we have not sold our contribution to society very effectively.”
Bell says the only thing you can guarantee with pensions policy is that it keeps changing.
He says: “Regulatory-driven change increases every year like a snowball rolling down a mountain and Brexit is an added complication that we could perhaps do without. I tell our staff, if you don’t like change you are working for the wrong business in the wrong industry.”
Pensions minister Richard Harrington
During my first six months as pensions minister, I have been listening to the industry, businesses and consumers about their hopes and issues for the future. I am pleased to set out some key private pensions priorities for this year so people can be clear about what is important to this Government.
A top priority is to make sure the rollout of automatic enrolment continues to be a success. As I come from a business background, I want to ensure we have a system that works both for individuals and employers.
One micro employer I met recently was clear supporting pension saving was the right thing to do, but also told me about the challenges they face meeting legal obligations while focused on growth. This view may be common to many small businesses.
Just over a million small and micro employers will be required to enrol their staff before March 2018. This year, we will carry out a review of auto-enrolment and I would strongly encourage all interested parties to contribute. Supporting smaller employers through auto-enrolment is both a huge opportunity and a challenge, and I want to see the pensions industry create products and services that appeal to and work for businesses.
I want to ensure protections are in place to help new savers make the right choices, which is why we are consulting on a new, single guidance body. We are also speaking with the industry on new measures to prevent pension scams and ban cold-calling. It is crucial consumers are educated about their options, so I urge the industry to look at what more they can do to keep savers informed.
Following a small number of high profile cases in 2016, I am also looking at the challenges facing some defined benefit pension schemes. I shall be publishing a green paper that looks at a wide range of issues, including whether it would be helpful for some schemes to consolidate to secure the best outcome for members, and whether additional powers for The Pensions Regulator are needed.
These are just some of the challenges we face. I look forward to working with the industry and others throughout the year as we tackle these important issues.