Over the last few years there have been some monumental changes in pensions policy in the UK. Throughout 2016 we have seen a continuation of these policies and the beginning of a totally new pensions landscape starting to emerge.
Not all of the changes have been unqualified successes. The three flagship policies of a new state pension, auto-enrolment and pension freedoms are still essentially work in progress and have yet to be fully tested. There have been both highs and lows in these and other areas as the policy framework becomes more fully developed.
Six events which have dominated the domestic pensions calendar in 2016
The new state pension came into force on 6 April, initially worth £155.65 a week. The idea is that it will simplify the former state pension system by moving to a single, flat-rate pension. But the take-on and the transitional arrangements are complicated and millions are confused and feel let down by them.
Government communications to date have left a lot to be desired and much more effort is needed to explain the workings of the new pension to the public at large.
April 2016 saw the end of contracting-out and NI 'rebates' for both members and sponsors of defined benefit pension schemes. The full impact on employers’ willingness to subsidise existing DB schemes going forward has yet to be seen. This could, however, be another nail in the coffin of DB schemes in the private sector.
For employees, the change increased their NI contributions by 1.4% on incomes between £8,060 and £42,380, which works out at up to £40 a month in extra NI. For employers, the impact is even worse, with their contributions rising by up to £97 a month per scheme member. With a large workforce this adds up to a lot of extra tax to pay for millions of workers.
The first independent review into state pension ages produced an interim report towards the end of the summer. Whilst it did not make any firm recommendations, it did point out the possible difficulties of maintaining a single age point for all, in the face of seemingly ever increasing longevity.
The government has confirmed that the triple-lock for state pension increases will continue for the duration of the current parliament but has recently signalled that it may not be possible because of rising costs to maintain it beyond 2020.
It is not yet clear how this is all going to be resolved, but over the next few years some big political decisions will need to be taken on both state pension ages and the future of the triple-lock.
Auto-enrolment really stepped up a gear in 2016, with thousands of smaller employers joining the larger organisations and now contributing to pensions on their employees’ behalf.
By the end of 2016, more than 500,000 employers will have gone through auto-enrolment which will lead to millions of workers being enrolled in workplace pensions, some for the very first time in their lives.
Without doubt, auto-enrolment has been a great success so far. Opt-outs have been relatively few (less than 10%), however worries remain about the low level of the minimum pension contributions required (8% of band earnings) and the inadequate pension outcomes these are likely to produce. When and how to address this is now becoming one of the burning questions of the day.
With effect from the start of the 2016/17 tax year the Lifetime Allowance was reduced from £1.25 million to £1 million, hitting both high earners and many other long-serving scheme members.
A ridiculously complicated annual allowance taper for those earning six figure salaries will also potentially reduce maximum contributions eligible for tax relief to £10,000. In addition to this, in the Autumn Statement it was announced that the current Money Purchase Annual Allowance of £10,000 (for people who have already withdrawn funds from their pension pot) will be reduced to £4.000 from next April.
Although the Treasury is now saying there are no current plans to alter existing pension tax reliefs it beggars belief that there will not be further changes at some point in the near future, possibly moving to a flat-rate of tax relief and further tinkering with the Lifetime and Annual Allowances.
The revolutionary changes offering freedom and choice to pension savers as to how they access their pension pots have proved very popular with consumers throughout 2016.
Many people have opted for either cash or income drawdown arrangements in lieu of purchasing an annuity whilst sales of the latter have reduced, however not dropped away altogether. The industry must try to make the system work in the best interest of pension savers as a whole. Advice and guidance services clearly have an increasingly important role to play from hereon in.
It is important to note that following the introduction of the freedoms there has been a noticeable increase in pension scams which have resulted in a number of vulnerable pensioners being swindled out of their lifetime savings. The government has recently announced its intention to impose a ban on cold calls to try to put a stop to this pernicious type of fraud. Whether the proposals go far enough and will make a difference is debatable, but clearly everything possible must be done to try to put an end to this, which has afflicted many vulnerable pensioners over the last year.