By Fiona Tait, Pensions Specialist
2015 was quite a year for pensions. Change, more change, and proposed changes to the changes.
The Spring Budget – pre-election plans
With everything that has happened since, it is hard to remember what happened in March. Following on from the bombshell of the 2014 Budget, the Chancellor confined himself to announcing a consultation on second hand annuities and a further reduction to the Lifetime Allowance from £1.25m to £1m as at April 2016. And even these might not happen.
We now know that the former will be delayed until April 2017; the latter, while still happening, may well get overwhelmed by the changes to tax relief in 2016. Still, it's the thought that counts.
The new tax year – freedom and choice
According to the ABI, providers experienced an 80 per cent increase1 in the number of calls received in the first few weeks after the new pension freedoms were implemented, followed by the payment of £4.7bn in withdrawals over the next six months2.
The good news is that savers appear to be acting very sensibly by cashing in smaller pension funds and using larger funds to provide an ongoing income. The average size of pension funds taken as a single lump sum was just under £15,000, whereas the average fund going into income drawdown was £65,000 and the average annuity purchase amount was £53,300.
This may be because most of those withdrawing cash have other pension savings available. Research carried out for Royal London showed that nearly three-quarters of our clients in the first few weeks had other pension plans, and in fact the plan being encashed accounted for less than 25 per cent of their total funds3.
The general election – tax relief ideas
In the run-up to the election the main parties were falling over themselves to demonstrate how they would make pension tax relief fairer for everyone. By this they mostly meant making sure 'rich' people do not get more relief just because they pay more tax.
The various manifestos did turn out to be useful, however, since they inspired a lot of research, most of which came in handy when responding to the tax relief consultation.
Unfortunately, the Conservative contribution to the cause was the proposed introduction of the tapered Annual Allowance, which has knocked back simplification by about six years. Even more unfortunately, they confirmed their intention to go ahead with it in the Summer Budget.
The Summer Budget – another shake-up
Having got rid of those pesky Liberal Democrats (sorry Steve!) the new government decided it was time to implement a few more of its own ideas in the form of a special budget. This included the launch of a consultation into pension tax relief, entertainingly titled 'Strengthening the incentive to save'.
In the consultation document the Treasury assured us that the best method of achieving its aims might well be to retain the current system with no change. However, I am not aware of any pensions aficionados putting money on this outcome. Certainly advisers would do well to consider which of their clients are likely to benefit from making a pension contribution while the current regime is in place.
We have discussed the pros and cons of the different options at length in previous articles so it suffices to say here that the result could be the most fundamental change to pensions since, well… the last one.
The Autumn Statement – post-election planning
Last, and pretty much least in terms of pensions, we had the Autumn Statement. If you were paying attention you would have noted the announcement that the maximum rate of the new State Pension will be £155.65 per week in 2016/17. Less obvious is the underlying intention to switch responsibility for financial stability in later life away from the Government and towards the individual.
A key part of this plan is automatic enrolment, and the Autumn Statement also confirmed that increases to the minimum contribution rate would be delayed by six months in order to coincide with the tax year-end. Bad news for Royal London consultants hoping to be paid for increments but probably not a big deal in the grand scheme of auto-enrolment if it helps to simplify administration and reduce opt-outs.
So with 2015 behind us, we are all left on tenterhooks (you are, aren't you?) regarding the result of the tax relief consultation, which will be unveiled in the 2016 spring budget.
- Source: ABI press release “6 stats for 6 months: The ABI on the first 6 months of the pension freedoms” published October 2015.
- Source: ABI press release “£4.7bn paid out in first six months…” published November 2015.
- Research carried out by Harris Interactive Limited on behalf of Royal London between 18 May and 24 July 2015.