Andrew Tully: The calm before next year’s pension storm

Andrew Tully White background 700

It was a novelty to have an Autumn Statement that did not have a fundamental impact on the pension landscape. However, it still introduced a number of smaller ticket items that will affect many people, as well as clear indications that more major developments are on the way.

To simplify the administration of automatic enrolment for small employers, the timescales for increases to minimum contributions will be aligned to tax years. So, instead of increases taking place in October, they will now occur in April of the following year.

That means minimum contributions will rise to 5 per cent from April 2018, rather than October 2017, and then to 8 per cent from April 2019, rather than October 2018. It is surprising that what seems like such a minor delay saves the Government around £390m in tax relief in 2017/18 plus £450m in 2018/19. For an average earner, it may mean around £600 less is paid into their scheme than would have been the case.

Auto-enrolment is designed to build upon the base provision provided by the state. The maximum amount of the new single-tier state pension was confirmed as £155.65 when it is introduced for those reaching state pension age after April 2016.

However, it remains the case that most people in the early years will not receive this full amount owing to periods of contracted-out employment or an incomplete National Insurance record. The basic state pension for existing pensioners will also increase to £119.30: a jump of £3.35 a week.

The FCA confirmed shortly after the Autumn Statement that its Retirement Income Market Study, which considers how the retirement market is working in light of pension freedoms, will now report in Q2 2016, later than originally planned. This is clearly an important area, as recent statistics have demonstrated the majority of those taking benefits are not shopping around for the best deal.

Other significant pension changes were referred to briefly, confirming next year will be yet another big one for the retirement landscape. During the summer, the Government launched a consultation on pension tax relief in order to gather evidence and views on whether the current system is the best option. It will publish its response in the 2016 Budget. Higher earners may wish to take the opportunity to put money into pensions now while higher rate tax relief is available, as this fantastic benefit seems unlikely to survive long.

We are also set to get more details of the secondary annuity market over the next few weeks, as the Government pushes ahead with its controversial plan to allow people to sell their future income in exchange for a cash lump sum.

A couple of pension topics were notable by their absence. For example, there was no mention of the lifetime allowance, which is due to reduce to £1m from April 2016. In a world of heavily restricted payments into pensions it would be ideal if this unnecessary limit was abolished altogether. April will also see the introduction of the tapered annual allowance, restricting the tax efficient payment that those earning £150,000 and more can make to a pension. As a result of its complexity many wanted the Government to remove or change this provision but it now seems inevitable it will start next year.

There was one potential silver lining for pensions. The Government will introduce a 3 per cent surcharge on rates of stamp duty on purchases of buy-to-lets and second homes. Many people consider property their source of retirement income rather than a pension but this change is likely to have a significant impact on the market.

It is evident the Government’s focus on pensions has not diminished. This quieter-than-normal Autumn Statement (as far as pensions is concerned) is merely a prelude to a year of very significant developments. Next year is likely to bring major changes to pension tax relief and details on the future of auto-enrolment, as well as further regulatory scrutiny around the retirement market and the specifics of the Government’s moves to introduce the secondary annuity market.

With this in mind, remember to take a few deep breaths before embarking on another tumultuous year.

Andrew Tully is pensions technical director at Retirement Advantage