Last year saw more changes to pension regulation proposed than at any time since A-Day and 2011 is not going to provide much of a let-up.
From April 6, pension tax relief is to be restricted with the annual cap on tax-relieved contributions reduced from £255,000 to £45,000. However, while the cap has been reduced, tax relief up to this limit will still be paid at the full marginal rate. Pension savers will also benefit from new carryforward rules, which will mean any unused annual allowance can be carried forward for up to three years.
The first part of the year will see the end of transitional arrangements made by the last Government to ease to the passage to the new tax relief rules and offers opportunities for one-off pension contributions above the new annual cap.
Barclays Wealth vice-president of tax efficient investment Catherine Penney says: “The transitional rules which will apply in the first quarter of 2011 give 40 per cent taxpayers earning less than £130,000 a year their last opportunity to make contributions in excess of £50,000 to their pensions. This has not been particularly widely publicised but as we move towards the tax year-end, investors will make more and more one-off contributions.”
But Hargreaves Lansdown head of pensions research Tom McPhail says adjusting pension input periods to take advantage of the changes can be tricky. He says: “Pension input periods are going to be a problem. I do not think many people have considered how they are going to work.”
April will see the introduction of the new rules on flexible drawdown to replace the requirement to buy an annuity at age 75. The new rules set the minimum income requirement at £20,000 a year. Above this level, there is a great deal of freedom over what can be done with the rest of the pension assets.
There are concerns some providers may be unable to incorporate the new rules in time for the April deadline but for those that can, 2011 could see a spike in drawdown business.
Alliance Trust Savings head of pensions Steve Latto says: “The income provided by annuities has been on a downward trend, which has been one of the reasons for the increased popularity of income drawdown.
“The Government’s announcement that the maximum income available via income drawdown will fall from April this year may see people bringing forward their decision to move into drawdown. These two factors could result in a drawdown boom in the first quarter.”
April will also see the soft launch of Nest as it expects to open its doors to the first companies which have volunteered to be guinea pigs.
The fight over reform of public sector pensions is likely to continue to rumble on. Lord Hutton is due to publish the final version of his report into public sector pensions in time for the Budget in March but opposition from the unions is likely to see this stay as an issue of contention throughout the year.
This year will also see several other important reforms come into effect. In April, the consumer price index takes over from the retail price index as the official measure of inflation for pension schemes and the basic state pension will see future increases benefit from the “triple-guarantee” of rising by the highest of earnings, the RPI or 2.5 per cent.
The default retirement age is to be scrapped from October 1.
McPhail predicts this year will see the decline in defined-benefit pension schemes continue but it will be another good year for low-cost Sipps. He tips 2011 particularly as the year that workplace wraps really take off.
But the most significant change could be from a Government policy that is still to be formulated. In October, pensions minister Steve Webb promised a green paper on reform of the basic state pension by the end of 2010 but the publication was pushed back to 2011.
Many pension reformers had hoped to see the state pension set on a residency basis at around £140 a week but there are concerns that difficulties over merging a new single state pension with the current contracting-out rules may be holding up the green paper.
Saga director general Dr Ros Altmann says: “I hope this much needed reform of state pensions is not held up by a desire to maintain the horrendously complex and costly system of contracting out. We must make it safe for people to save in a private pension by paying a proper state pension without means-testing.”