Ironically as the World became destabilised by the twin forces of Brexit and Donald Trump – not to mention a UK general election, mounting global tensions over North Korea and an emboldened Vladimir Putin – 2017 was a year of relative tranquillity for pensions.
Aside from the illogical and unnecessary cut in the amount savers who have accessed taxable income from their pension can subsequently pay in each year from £10,000 to £4,000 (the Money Purchase Annual Allowance) the UK’s retirement rules enjoyed a period of relative stability.
Indeed, the November Budget was one of the quietest in memory for pensions, with the Chancellor confirming a rise in the lifetime allowance by £30,000 to £1,030,000 (in line with Consumer Price Index, or CPI, inflation) and the uprating of the state pension by 3% (again simply protecting the payment from inflation). Journalists, advisers and media commentators who have become accustomed to digging up dirt in the deep recesses of the Chancellor’s documents for once came out empty handed.
Given the set-piece was preceded by feverish speculation about potentially dramatic cuts to pension tax perks as part of an attempt redressing the balance between older and younger voters, this came as welcome relief to savers (particularly higher and additional-rate taxpayers) and advisers.
However, rumours the Treasury plans to slice and dice savings incentives do little to engender confidence in the long-term stability of the system. It is critical that people can trust pensions and don’t fear the rug being pulled from under their feet after they have committed money to a product for decades.
We continue to believe that a Long-Term Savings Commission should be established, independent of Government, to help build consensus about the future direction of UK savings policy. If this led to agreement over pensions tax and savings rules it could have a transformative impact on people’s confidence in the system, and encourage increased levels of retirement saving.
Indeed, an excellent article by former Labour shadow pensions minister Gregg McClymont – now of Aberdeen Asset Management – cites the example of Sweden, a country where an informal agreement not to introduce changes to pension policy without cross-party support has held since 1994.
In the absence of such a commission, it seems inevitable potential cuts to pension tax relief will once again hit the headlines in 2018. As automatic enrolment is rolled out to more savers and minimum contributions are gradually increased, the upfront cost of tax relief to the Treasury will inevitably creep higher.
The latest HMRC estimates suggest the annual tax cost of pension tax relief is now over £40billion – a bill that will inevitably rise as automatic enrolment contributions ramp up. And with growth forecasts for the UK revised down by the Office for Budget Responsibility the temptation to raid the pension tax honeypot to fund spending could yet prove irresistible for the Chancellor.
On the flip side, the combination of the Government’s weak Parliamentary position and the all-consuming nature of Brexit might leave policymakers hamstrung when it comes to pursuing potentially controversial reforms.
Alternatively, the microscope could instead turn on the treatment of pensions on death. The current regime – whereby untouched defined contribution pots can be passed on tax-free – looks very generous in the context of a sluggish economy and a Chancellor strapped for cash. Again, the big obstacle to reform here could be political – namely the Government could be fearful of introducing anything that could be dubbed a ‘death tax’ in the media.
If the future of the pension tax regime is likely to remain up in the air, it’s a racing certainty that the ‘freedom and choice’ reforms introduced in 2015 will face further scrutiny next year. The Work & Pensions Committee has already launched an inquiry into the reforms and is expected to produce a formal report in next year.
In addition, the Financial Conduct Authority’s Retirement Outcomes Review is ongoing with a final report, including any remedies to perceived market failures, also due in 2018.
Given the significant impact the freedoms have had on the UK retirement landscape, both the Committee’s report and the FCA review are likely to cover a wide range of issues.
Much of the initial Committee debate focused on the danger posed by pension scams – an area where the Government has talked big but delivered little. A package of vital reforms designed to deter scammers – including a ban on pensions cold calling – were proposed at the end of 2016 following a significant campaign led by advisers, consumer groups and providers like AJ Bell. But with Brexit dominating the Government agenda it’s possible these measures won’t become law until 2019.
Defined benefit (DB) transfer advice is also likely to take centre stage in the next 12 months. Concerns around quality of and access to advice have bubbled beneath the surface of mainstream media in the past two and a half years but recently exploded into life when stories emerged of British Steel Pension Scheme members being preyed upon by less-than-reputable ‘advisers’.
There is another side to this story, however, with advisers Al Rush leading a charge from the IFA community to help for members who either feel they have been duped or remain unsure what they should do.
It is inevitable that both the British Steel scheme and advice standards more generally will come under scrutiny as the Committee attempts to guard against the risk of a misselling scandal. And the FCA is on the case too after suitability testing of 88 positive DB transfer recommendations found almost a fifth (17%) were ‘unsuitable’. That said, some 44% were deemed suitable while on over a third (36%) ‘it was unclear if the recommendation was suitable’.
In terms of the FCA’s Retirement Outcomes Review, a key focus will be on the competitiveness of the drawdown market, product innovation and the extent to which non-advised consumers are shopping around. It’s vital as the regulator considers any action here it acknowledges the fundamental difference between buying an annuity and entering drawdown.
While buying an annuity is a “one-and-done”, irreversible decision, savers in drawdown can switch provider at any time. Furthermore, most non-advised customers entering drawdown simply want their tax-free cash, so are likely to take the path of least resistance (i.e. sticking with their existing provider).
The sustainability (or otherwise) of pension freedom withdrawals is also likely to take centre stage in 2018. AJ Bell research of 250 savers who have entered drawdown since April 2015 shows 44% made withdrawals of 10% or more from their fund.
Furthermore, it appears younger cohorts of savers (55-59) are grossly underestimating life expectancy, with some 51% expecting to live 20 years or less. Given that average life expectancy is somewhere between 24 and 30 years for this cohort (depending on your sex) there is clearly a risk non-advised savers are making poor decisions and draining their pension too quickly.
More broadly, access to advice and guidance will be a central area of concern both for the Committee and policymakers. The Financial Advice Market Review (FAMR) continues focus on boosting access to regulated advice – primarily through encouraging firms to develop simplified ‘robo-advice’ propositions – while efforts are being made through the House of Lords to make guidance through Pension Wise mandatory for defined contribution savers.
On this second point, the proposed amendment put forward – while undoubtedly well meaning – risks causing huge friction in the market if savers who have decided they want to access their money face an extra barrier. We believe the Government should instead focus its efforts on boosting access to advice and improving communications with consumers to encourage more people to engage with their pensions.
Elsewhere the flagship auto-enrolment reforms will hit a crucial phase next year as total contributions edge up from 2% to 5%. A review of the reforms due to be published shortly is also considering ways to expand the reforms, including potentially creating a contribution matching mechanism for the self-employed.
All-in-all 2018 looks set to be another big year for pensions policy, with advisers playing an absolutely critical role in drowning out the noise and helping clients make the most of their savings.
I’ll end by saying Merry Christmas and a Happy New Year, and I’ll be back next year to see what (if any) of these predictions have come to pass!