Pensions policy disruption
Being warned to prepare for a year of disruptive pensions policy, advisers are facing the prospect of long-term savings being viewed in a completely new light.
It is relatively likely that the current pension tax relief model will be reformed, as the Government seeks to make significant savings following Brexit negotiations and predicted impact on UK economy growth.
As the Lifetime Isa is rolled out, the influence of former chancellor George Osborne will continue to be felt on pensions. The industry also continues to reiterate its fears regarding the product and the subsequent impact it may have on pension saving.
As studies have indicated, there is a growing need to widen availability and increase access to retirement advice as well as consideration of auto-enrolment.
Commenting on the ambiguity of the upcoming year was Tom McPhail. The head of retirement policy at Hargreaves Lansdown stated: “It’s going to be a pretty uncertain year. It’s a case of the unknown unknowns: first there is the destabilising factor of Brexit, and the extent to which that will dominate the Government’s agenda. Then you’ve got Mifid II, the Financial Advice Market Review and the asset management market study.
“These are all big pieces of work, any of which could significantly disrupt companies’ business models. They have the potential to be a force for good, but they are disruptors as well and you have to be mindful of how they could change things.”
Providers and commentators on pension taxation are expecting the matter to gain momentum during 2017, given the length of time the issue has been on the political agenda.
Commenting on Philip Hammond’s approach to pensions differing from that of previous Chancellors was Iain Anderson. The Cicero Group executive Chairman highlighted the lack of utility in forecasting any changes made to pension tax relief as well the issue being wider than just pensions themselves.
“Predicting any movement on pension tax relief has become something of a fool’s errand. We know the work has already been done, and the Government looked at it and then chickened out. But we also know this is not just about pensions. If you create a flat rate it will have potentially huge fiscal benefits for the Government, and also it fits with the Theresa May mantra of a Government that works for everyone, rather than just those at the top.”
The idea of change being on the horizon since the Autumn Statement, was highlighted by Jamie Jenkins. The Standard Life head of pensions strategy stated that the fall in money purchase annual allowance indicated an appetite for change.
“All the issues that gave rise to the first pension tax relief consultation are still there. Hammond is clearly concerned about the cost otherwise he wouldn’t have reduced the MPAA. He made several clear statements in the Budget documents about the concerns over the increases in costs. The complexity of managing the existing system within budget is increasing all the time with the changes that are being made around the fringes.”
Due to launch in April, the Lifetime Isa is thought by many to be the precursor to pension tax relief changes and has led advisers, trade bodies and providers alike to express concern. The Isa enables savers to put in an annual amount of £4,000, with a Government contribution of 25%. The saved funds can either be used to fund a first home of £450,000, accessed when an individual reaches 60 or in the event of a terminal illness.
If the funds are withdrawn for any other purpose, a 25% penalty charge will be incurred.
There is concern over the impact that the Lifetime Isa will have upon pension saving and a resulting need to educate the public on the benefits.
Baroness Ros Altmann, the former pensions minister, stated: “Pensions face an existential threat, with some parts of the Government apparently wanting to turn them into Isas instead. This would be a disaster for future generations and for future governments. During 2017, there is an opportunity for everyone involved in pensions to do as much as possible to help the public understand the benefits of pension saving – we need a widespread public promotion campaign for pensions.”
Alongside these concerns, are those relating to misselling and the potential for a future scandal to emerge. AJ Bell chief executive Andy Bell highlighted his concerns in relation to this:
“The Lifetime Isa will pose a major challenge for advisers and for the industry. The Government has thrown a total curveball here. Advisers will have to consider whether an Isa, a Lifetime Isa or pension is the most appropriate vehicle for long-term savings. I predict there will be a misselling review before the Lifetime Isa reaches its tenth birthday. Which is the most appropriate savings vehicle will be quite easy to determine, with the benefit of 20/20 hindsight. Without this superpower, it will be a difficult judgement call.”
Auto-enrolment will also be looked upon as a means of increasing pension saving accessibility for those in multiple jobs or are self-employed.
Commenting on the potential impact the auto-enrolment review could have on pension saving was Fiona Tait. The Royal London pensions specialist highlighted the need to establish who would be eligible as well as how the attitude surrounding auto-enrolment had changed.
“When auto-enrolment was first rolled out, everyone was concentrating on making sure nobody who shouldn’t be saving should be put in. What we seem to be getting now is at the other end of the scale, in that anybody who isn’t putting in is losing out. It reflects a change in direction which shows how successful the initiative has been so far.
“But there is truth to the argument that the more successful auto-enrolment is, the greater the impact on the Treasury’s finances, and that can have a knock-on impact on wider pensions policy.”
Although the review will not result in any changes this year, Steven Cameron highlighted its importance during the course of the year.
The Aegon UK pensions director stated: “The single biggest development going through 2017 will be the review of auto-enrolment. The most fundamental change the Government could make is finding a way of delivering equivalent auto-enrolment benefits for the self-employed and the ‘gig’ economy.
“That is a huge undertaking but the current Government’s pension policy is unsustainable when you look at the divisions that have been created between employees and those in non-traditional working patterns, which is a growing trend.”
Where pensions guidance and advice is concerned, accessibility remains a prominent issue. The Financial Advice Market Review (FAMR) continues its work in relation to this whilst the Government’s new guidance body starts development.
Fiona Tait went on to highlight the need for individuals to be adequately informed on the shift away from pension paternalism and what this means for them.
As a result, there is a prominent need for a service which can inform those who cannot access one which can provide full advice.
“There will be many advisers who will continue doing what they’re doing and for whom FAMR will make no difference, because they offer a full, in-depth, face-to-face advice service. But we need something else for people who have been auto-enrolled, and those coming up to retirement, with services that are less comprehensive for those that cannot afford the full vehicle.”
Engagement in pensions on the whole has been highlighted as the biggest hurdle by Tom McPhail.
“There is still an unanswered challenge for the industry in how it demonstrates to the mass of consumers that it can make their lives better by making it simple for them to save and invest in their future. In pockets we do that very well, but whether it is pension taxation, auto-enrolment, charges, or governance, there are still too many complex areas which leads people to stick their money in a bank account, buy a property or just not bother with pensions altogether. That remains the big challenge for our industry – we have not sold our contribution to society very effectively.”