Pensions in 2016
This article touches upon some of the changes that have already happened and outlines some of what may be to come in 2016. It will be of particular interest to private clients undertaking pension planning, either pre or post retirement.
Pensions in 2016
Last year saw some really significant changes to how pensions do and will operate going forwards, both for those saving for and those actually in retirement. Pensions in 2016 look set to undergo as much change as happened to them in 2015.
Last April new freedoms were introduced that allowed savers to spend their retirement funds how they like. In theory at least although, as with all things pension, it was not quite that simple as many have found it hard to access their pension pot or have discovered that they have to pay charges to do so, to their advisers, their pension providers or both.
“We know that there are more changes to come.”
This year we know that there are more changes to come. We already know that the new state pension will be introduced, additional-rate or higher rate tax relief will be cut and the lifetime pensions allowance is to be reduced to £1m.
It is our opinion that there will be more changes to come this year as previously announced changes with little detail become clearer and the issues surrounding pensions are fought over by The Treasury, the DWP, the pension providers and the financial press. Here are some other likely changes that could affect your retirement savings over this coming year. Be aware, however, that some of this is informed guessing and conjecture and details are subject to change, cancellation, political whim and provider pushback!
“It seems highly likely that tax relief on pension contributions will be reduced.”
It seems highly likely that tax relief on pension contributions will be reduced; in fact some are even going so far as to state that it will be abolished completely. We do not believe that a full abolition is likely but we would suggest that if you are a higher rate taxpayer and wish to make pension contributions that you do so before March to ensure your best chance of investing with full higher rate tax relief whilst it is still available.
The Government launched a consultation on pensions tax relief last year and the Chancellor has said the changes will be announced in the Budget in March. It is highly unlikely that there will be no changes announced after such heavy backing from the Chancellor.
The emerging consensus seems to be that the rate of relief will be reduced to around 33% from the current individual’s highest marginal rate” (the highest effective rate of tax that each individual pays, which can be 60pc in some cases but is normally 45pc, 40pc or 20pc, depending on income). However, again I would remind you that this Chancellor is determined to see huge savings on the State budget and that the cuts to tax relief could be much deeper than this.
“Some have been calling for a Pensions ISA.”
Some have been calling for a ‘Pensions ISA’ with no up-front tax relief but no tax upon retirement which has gained some traction with commentators and the public but this would mean an effective gamble that future governments would not renege on the no tax on exit promise. Future governments cannot be held to account this way so this truly would be a huge leap of faith for the investing public.
The annual allowance is also to be reduced from £1.25m to £1m but this is causing real issues for both advisers and the public as HMRC have still not finalised how this is to be documented. There are also some commentators such as Alan Higham, founder of pensionschamp.com who have said they expect the annual and lifetime allowances to be scrapped as part of the changes. This is something we would favour as the annual allowance is an absolute minefield for the unwary and penalises huge swathes of ordinary savers in both the public and private sectors and can actually penalise those with efficient investment strategies. Planning not to breach a £1m pension fund limit is extremely difficult and, in our opinion, an unnecessary complication for too many who are trying to do the right thing with their pension planning.
The Government has launched consultations in each of these areas and is expected to announce new policies next year. Changes could include a ban or cap on exit fees, a cap on transfer times and cheaper financial advice becoming available.
Pensionable ages are rising, particularly in relation to state pensions with many women caught off-guard having to wait longer for their state pension. It will be interesting to see if the huge groundswell of poor publicity and some excellent campaigning highlighted by Jeff Prestridge at the Mail on Sunday will prompt any sort of rethink, particularly in light of the former Pensions Minister Steve Webb’s comments admitting that the move was ‘perhaps’ ill-thought out.
Currently, benefits from private pensions can be taken from the age of 55. However, rises in life expectancy are putting ever greater pressure on individuals to ensure that their pension funds can last for a very long time.
Therefore, a number of experts have said the Government may set about tackling this issue by setting the age at which an individual can draw private pension benefits ten years before their state pension age. We will have to wait and see whether any announcements are made on this particular pension planning issue.
“Final salary schemes will get less generous.”
Final salary schemes will get less generous as second state pension contracted out schemes disappear and National Insurance rates rise for scheme members. We may, therefore, see these schemes adjust the terms of their schemes to make them less generous or as is more likely further closures of these schemes in favour of money purchase or defined contribution schemes.
Public sector defined benefit schemes are also coming under Government pressure with changing contribution levels and retirement ages. This is a trend that we see continuing as there is a huge national liability within these largely unfunded schemes.
The ability to sell a previously purchased annuity via a ‘Second-hand’ annuity market will have their applying rules clarified this year. There is a huge amount of disquiet over this issue with many commentators unsure of how value to the seller can be enforced and maintained in this fledgling market. Who will buy them and act as market makers is also unclear at this stage. The ability to be able to sell an annuity looks set to come into force in April 2017.
“Revisit your pension planning.”
We would, as you would no doubt expect, recommend that you revisit your pension planning in light of announced and likely changes to legislation as soon as possible. If you are a higher rate tax-payer we would urge you to consider making any planned contributions ahead of any announcement from the Chancellor in March this year and if you wish to discuss this please do not hesitate to contact us or call your usual wealth manager on 0207 337 1390 who will be happy to assist you with your options.
Lee Robertson, CEO
Lee is a Chartered Wealth Manager and is listed in the definitive Spears Wealth Management Index as one of the UK’s top 10 wealth managers and was named as the Asset Manager of the Year for High Net Worth Investors in the 2015 Spear’s Wealth Management Awards. His uncompromising standards in private client wealth management means he is a regular contributor to the financial press and is often on television discussing wealth management and investment issues.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.
Investment Quorum is authorised and regulated by the Financial Conduct Authority.
If you have enjoyed this article please feel free to share it via any of the social media sharing buttons below.