The changes to the UK pension system over the last few years have been seismic in their range and intensity. The original concept of a pension plan – to produce an income in retirement – has been turned on its head by the pension freedoms. What is more, we have a new way of (near) compulsory saving in auto-enrolment and a new state pension to boot.
But despite all of this upheaval we are not yet at the end of the process. In fact, we are probably not even in the middle of it. There is likely to be a lot more still to come.
So, as we approach the end of the year, here are eight areas I expect to dominate the pensions landscape in 2016 and for which, in many instances, the outcomes are as yet uncertain.
1: The single-tier state pension
This has not materialised as the “more generous, easier-to-understand, flat rate” pension many were expecting – at least not in the short term and possibly not for many years to come. The transitional arrangements are incredibly complex and difficult to explain. Contracting-out deductions, perceived loss of guaranteed minimum pension uprating and allegations of unfair treatment of women under the new system are likely to continue to be a source of controversy and debate up to and beyond the introduction of the new pension on 6 April 2016.
2: The ending of contracting-out
The loss of rebates and consequential increases in National Insurance contributions for both employees and employers with defined benefit schemes could prove extremely problematic when they take effect next April. They could prompt some employers in the private sector to recoup the extra costs by increasing members’ contributions, worsening the terms or even closing down their schemes altogether. Public sector schemes will be similarly affected but will have more limited options as to how they can absorb the extra cost. Expect to hear a lot more about all of this when the impact of the changes starts to hit home in the spring.
3: Tax relief
We await with bated breath details of the changes to pension tax relief the Chancellor probably has in store for his next Budget. This could involve either a single percentage rate for all (e.g. 30 per cent) or the even more radical pensions-as-Isas.
4: Auto-enrolment capacity crunch
Coping with the very large number of small employers who will be coming on stream over the next two years will be a major challenge for the pensions industry and for Nest in particular. It is not beyond the bounds of possibility that the phasing-in programme could be subject to delays or even grind to a complete stop as a consequence.
5: Help for the self-employed
There is a growing feeling that more help needs to be given to the self-employed to encourage pension saving. One possibility is that self-employed workers are included in the same way as employees as part of the auto-enrolment programme and, perhaps, receive extra tax-relief or a Government contribution to compensate them for the absence of a separate employer contribution. If and when this is to happen may become clearer in 2016.
6: Advice versus guidance
Arrangements for the delivery of financial advice are currently being reviewed by the regulator and could result in further changes to the classification and functions of advisers. Take-up of the new Pension Wise service is also under scrutiny, as are the interfaces between guidance and advice, all of which may result in a radical reassessment of the support available to consumers in relation to pension freedoms next year.
7: Annuity re-sales
Following consultation, the Government is expected to give the go-ahead for existing annuitants to hand over their annuities to an external bidder in return for a capital sum. There will be a requirement for the seller to obtain financial advice before proceeding in some cases. Further operational details are expected soon in advance of a start date in 2017.
8: New guaranteed retirement income products
With the decline in conventional annuity sales following the introduction of pension freedoms it is widely recognised there is a need for a new type of guaranteed retirement income product. Ideally, this would combine the best features of an annuity providing the security of an offer of a regular income for life with the flexibility to secure a partial return of capital if needed. It is expected that more of these types of product will come on to the market over the next few years.
Malcolm McLean is senior consultant at Barnett Waddingham