Back in March, chancellor George Osborne hailed the Treasury’s Budget as one for ‘makers, doers and savers’. The new pension rules – designed to provide flexibility and choice – were undoubtedly aimed at savers; but the fallout from the changes will in many ways extend to employers.
In July the government set out its response to the post-Budget consultation. This included detailed plans which will enable the government to deliver on its ambitions. Dale Critchley, Technical Reform Manager at Friends Life, runs through 10 reasons why the latest reforms and regulations will impact businesses.
Employees in the past may have been members of a pension scheme until age 65; at this time, savers swapped their hard-earned pension fund for a tax-free cash sum and an annuity. But as people work past retirement and with more flexibility, schemes (and those who govern them) will increasingly need to look after savers’ money for longer.
If employers currently offer financial education, this will need to evolve so that it reflects the new flexibility and complements the information provided under the guidance guarantee. The guarantee will provide people with free, impartial guidance as they approach retirement.
A ‘permissive statutory override’ (this isn’t a 70s Canadian rock band) is being introduced by the government. It gives defined contribution (DC) pension schemes the ability to ignore their own scheme rules to allow access to the new flexibility. Employers need to decide if they will offer it.
With people likely to take all sorts of different options at retirement, it won’t be possible to simply target an annuity via a default investment fund. We think that new-style defaults could still focus on protecting value, while offering the chance of risk-controlled growth. Employers need to ensure their default is fit for purpose.
An uncrystallised funds pension lump sum (more unintelligible jargon I’m afraid) is a slice of pension pot made up of a tasty tax-free 25% and a rather stodgy 75%, which is taxed. Whether employees are better off consuming their pension pot this way, instead of the new ‘flexi-drawdown’, depends on what other earnings they have. Education is needed to make sure employees don’t make a costly mistake.
Employers need to be aware of the £10,000 money purchase annual allowance that will apply if an employee withdraws pension savings over the 25% tax-free cash limit. This limit addresses concerns that people (particularly over 55s) could avoid tax by having a large portion of their salary paid through a pension. Jam today may come at the cost of jam tomorrow.
DB to DC transfers will be allowed in most cases. New measures will be introduced to protect the scheme; a requirement that members must receive advice before transfers can be paid should go some way to protecting members’ best interests. Employers looking for opportunities to de-risk their DB scheme need to tread carefully.
It’s inevitable that with the scale of the changes being introduced, we see a domino effect of further reforms. It’s expected that either the 55% tax charge on lump sum death benefits will be reduced or a more innovative pension inheritance rule brought in as part of the autumn statement due later this year. This could further enhance the perception of pensions.
The new £15,000 limit is another boon for the already-popular ISA. We expect to see many people roll over unused money into a pension (which will benefit from tax relief) later in life. Some employers will be able to facilitate this by offering workplace ISAs alongside a pension under a corporate platform.
We think that the changes will encourage people to view pension saving as simply a deferred salary. More choice and flexibility should mean that faith in workplace pensions grows, with employees placing greater value on the benefits provided by their employer’s scheme.
You can find out more about Friends Life’s views on the Budget and other government changes by joining its Workplace Benefits Insight LinkedIn group.