A predominant theme in the world of pensions over the past 10 years has been constant change. But even against this backdrop of habitual and perpetual alterations, the first six months of this year look particularly full of significant developments.
Pension tax relief
The Budget in March brings two that could have major implications on the savings landscape. Pension tax relief could well be restructured to a flat-rate position where all taxpayers get the same tax relief no matter how much tax they pay. Or we could even move to an Isa-style system where no tax relief is given upfront but benefits will be tax-free at retirement.
This was the Treasury’s favoured method at outset. Either approach could bring significant tax savings to the Government but that should not be allowed to overshadow the need to help people save more for their retirement.
Financial Advice Market Review
The Financial Advice Market Review is also due to reveal recommendations as part of the Budget. Despite it being only a few years since the introduction of the RDR, further fundamental restructuring of the advice framework is being considered.
The aim is to try to extend advice to people with less wealth, perhaps by introducing the long-talked about simplified advice model. There are even suggestions of reintroducing some form of commission, which would no doubt be a highly controversial move.
Secondary annuity market
And before all of that we are set to get more details of the Government’s intentions for the secondary annuity market being introduced from April 2017. Extending the pension freedoms to existing annuity customers seems like a logical step. But – and this is a big but – people might not receive the sort of cash they expect once they do the sums.
While some people may find the idea attractive, those who have been sold a poor value annuity and then trade it in are unlikely to get better value. It also remains to be seen if advisers have the appetite to get involved in this business.
Single tier state pension
April then sees the introduction of a number of measures. The new single tier state pension comes into force for those reaching state pension age from 6 April. A great many people will initially get less than the maximum flat rate of £155.65 a week, so it is crucial people find out what base retirement income they will receive from the state.
Meanwhile, higher earners will see the amount they can save in a pension cut. Those with adjusted annual income above £150,000 will see the annual allowance gradually reduced until it falls to £10,000 for those with income above £210,000. The complexity is in the definition of adjusted income.
This is income from all sources, not just employment, so includes savings income and property income, as well as P11D benefits. It also includes personal and employer pension contributions. This means many people will not know their income until after the end of the tax year, increasing the possibility of a surprise tax charge.
The 6 April also brings a reduction in the lifetime allowance to £1m. It is easy to forget the LTA was as high as £1.8m at the start of 2012 but it has become an easy political target. With the tight curbs on the annual payments that can be made, the LTA is simply a tax on those who achieve good investment performance.
It should be abolished and hopefully this may happen as part of the tax relief changes. For now, those affected need to consider whether to apply for some form of protection and those who want fixed protection need to stop contributions before 6 April.
For both of these changes advanced planning is key. Paying a contribution ahead of the Budget may make sense in order to make the most of this year’s annual allowance and gain the certainty of tax relief.
On top of all these changes we can also add the continuing rollout of automatic enrolment to 500,000 smaller employers, as well as the latest instalment in the FCA’s work on retirement income, which is due in Q2. So there is much for advisers to contemplate over the next few months, with significant planning needed to help customers make the best decisions.
Andrew Tully is pensions technical director at Retirement Advantage