‘One in thirty pound coins in circulation is counterfeit.’ I wasn’t listening properly at the time, but assumed the Chancellor was explaining Quantitative Easing.
I jest of course, but I certainly started listening when he came on to talk about pensions.
Lost in some of what was announced on Wednesday were some measures to try and address the ongoing problem of pensions liberation. In themselves, they were welcome proposals, but seemed ever so humble compared to the wider ‘pensions liberation’ George Osborne laid out.
Unquestionably, the announcements on pensions were game-changing.
There are plenty of publications to read about them so I won’t repeat everything here. However, This useful guide from HM Treasury is both a neat summary and a primary source.
So we have changes almost immediately which lift the limits and increase freedom for people at retirement, but these are just temporary. The real changes come in April 2015, when the limits are largely removed altogether.
For most, these changes will be very welcome and we anticipate they will make pension saving more attractive; no bad thing when we still have millions of people to nudge into their workplace pension. A more cynical view is that people take all their pension savings and spend them, running out of money long before they die. However, exposing people to longevity risk isn’t a million miles from the risk that they face in buying a level annuity – as most do just now – and seeing the ravaging effects of inflation over time.
Additionally, the date at which you can take benefits is being increased to 57 in 2028, matching the increases to SPA of 67 at the same time. Thereafter, the 10 year link will be maintained. This limits the gap between work and State Pension which, in theory, limits people’s exposure to running out of money. And that in itself helps people quantify the risk.
What is very clearly recognised, however, is the need for people to receive guidance on their options. I choose the word ‘guidance’ carefully as there is a lot of variation in the language used to describe what was proposed here. In the note from Treasury, above, it states that ‘everyone with a DC pension will be offered free and impartial face to face guidance.’ In practice, this sounds like a very sizeable commitment, especially if ‘face to face’ is taken literally (and therefore excludes the use of Skype).
People who have saved into pensions over their working lives are unlikely to blow the lot as soon as they retire, during a dream holiday in Vegas or on the long desired Ferrari. And it’s right to give them more choice to draw out extra money when they need it. But they’ll need help to make the right financial decisions to ensure their savings meet their needs throughout a life after work that could last 40 years or more.
Subsequent comment has already acknowledged this is a key area and one that’s up for debate. This is why the consultation – closing in June – is so important.
But the changes in 2015 give us a range of other things to consider, such as:
– With the removal of compulsory annuity purchase, but the remaining need for income, we will undoubtedly see greater use of flexible income options. Or ‘drawdown,’ as we affectionately label it. Such options are already perfectly accessible now to those with larger pension pots, but we’ll need to consider how we widen this to make it easier for people with more meagre amounts.
– Default funds are typically geared towards 75% of each pension pot being used to purchase an annuity, and while some may still do this, it seems likely that many won’t; at least initially. The challenge will be knowing who is doing what, because the requirement remains to protect people’s pensions from significant market downturns close to retirement.
– The Personal Allowance is being raised to £10,500. Latterly, this has been linked to the threshold for automatic enrolment, but to retain this link will exclude another significant tranche of people earning below this level. Is it time to review the link, as the Personal Allowance fast approaches the minimum wage? And if so, should we have a look again at the related complexity of using band earnings in the calculation of contributions?
We have a lot to do to work through these issues and ensure that we adequately – and sustainably – support people before, during and after retirement. At least there is greater certainty on the regulatory framework ahead. For now.
Through almost a hundred years of successive pensions legislation, we’ve certainly taken the scenic route to reach this level of simplicity, but maybe we’ve arrived at our destination.
Indeed, the simplification for savings more widely is also very significant, with ISA allowances going up to unprecedented levels. At £15,000 per person per tax year, a couple with one person earning an income can put almost as much into their ISAs (£30,000), as they can into their pensions (£43,600) – albeit without up-front tax breaks.
With so much choice, people might just need a little advice. Who’d have thunk it…