How will the budget affect the pensions industry? You’ll find all the predictions, announcements and reactions here updated live as they come in…
17:37: Kevin Wesbroom, senior partner at Aon Hewitt thinks the new changes could signal a shift towards an integrated savings regime:
“The changes announced today may well herald a new era for employers and the benefits packages offered to employees.
”Weakening the tax breaks on pensions and promoting ISA reliefs could be seen as advance notice by the Treasury that they have their sights set on an integrated savings regime, covering both long term and short term savings – collapsing pension and ISA tax reliefs into a single system.
The changes announced today may well herald a new era for employers”
“Forward thinking employers may find that such an approach enables them to appeal to all of the demographics in their workforce and they can design incentives that appeal to their 25 year olds and their 65 year olds.
“With suitable technology support and member guidance and education, this need not increase costs – but will redistribute the existing spend across the broader workforce. ”
17:49: Michael Whitfield, CEO, Thomsons Online Benefits, argues that the resale of annuities could cause chaos:
“It will be total chaos to unravel up to 5 million people’s annuities based on the Chancellor’s recent announcement. If this goes ahead unfettered I predict a nightmare scenario where thousands of hard up folks will go further into hock and never getting out of it.
“Insurance companies are already reeling from the cumulative effects of Auto-Enrolment, the Retail Distribution Review and the ability for people to cash in their pensions for lump sums announced last year. The Chancellor’s latest pension reform, which will allow people who have already purchased an annuity to change their mind, will be the final straw for many providers.
It will be total chaos to unravel up to 5 million people’s annuities”
“If we really are to achieve a ‘come-back Britain’ then the government needs to do more to encourage financial education among every generation of worker, not just pensioners so they can make informed choices about flexible ISAs, savings and annuities. Employers are best placed to help employees with this challenge, and I’d like to see companies incentivised to educate their staff on how to make the most from their financial reward packages.”
17:43: Gary Shaughness, Zurich UK Life CEO joined many industry experts in calling for stability over the lifetime allowance:
“Stability is especially important with long-term decisions like pension savings. While we recognise that UK plc needs to balance its books, it is disappointing that the lifetime tax allowance has been targeted again with a reduction to £1 million, creating more uncertainty for savers.
We had also warned that lowering the threshold could end up impacting on middle earners”
“It is important to remember that the length of retirement is increasing as people live longer so we should be encouraging people to save more.
“We had also warned that lowering the threshold could end up impacting on middle earners, not just higher earners, especially given the effects of inflation on savings over a long period. Although the Chancellor has said that the lifetime tax allowance will be index linked from 2018, this will only partially mitigate the impact of this change for savers who have been doing the right thing for their retirement’.”
17:37: John Hanratty, consultant at Nabarro, argues the issuance of more long-dated Government stocks could be a boon for DB schemes:
“For defined benefit pension schemes, if the greater supply of long-dated gilts moves the price of those assets down, that may lead to an increase in yield which could result in lower defined benefit liabilities, although such a reduction in price would also have an impact on the assets of those schemes, some of which will be held in long-dated gilts.”
17:31: Nick Griggs, head of corporate consulting at Barnett Waddingham, says that new tax exemptions will be welcomed by employees who are considering providing advice to employees wishing to transfer out of DB schemes:
“The Chancellor has also announced a measure which will introduce a new income tax exemption for payments made when employers need to provide appropriate independent advice to employees as part of any employer-led transfer exercise from defined benefit (DB) to defined contribution (DC) pension schemes.
“This is timed to tie in with the introduction of the new flexibilities on 6 April 2015.
“The provision of advice is usually taxed as a benefit to the employee. This will be a welcome easement for employers who are considering such exercises as a way of allowing DB members to access the new flexibilities while also managing their pension liabilities, and for employees who wish to take their pension flexibly.”
17:28: Simon Bentley, client director at F&C Investments, says that the reduction of the UK’s deficit could prove problematic for UK DB pension schemes:
“Direct gilt holdings are popular amongst pension schemes for hedging liabilities but also underpin a lot of the liquidity in the synthetic gilt and swap markets. This makes the schedule of gilt issuance of particular interest to the majority of pension schemes who still have significant amounts of de-risking to do.
“The significant reduction in the UK’s deficit means that the Government’s overall funding requirement will decline materially over the next five years. Whilst this is excellent news for the economy it means that gilt issuance could fall by between 20% and 40% over the same period.
”This poses a challenge to pension schemes who have over £750bn of unhedged liabilities.”
17:22: Lydia Fearn, head of DC pension & investment consulting at Barclays Corporate & Employer Solutions, says that financial education will be key to overcome behavioural biases:
“Our view is that individuals often show a behavioural bias towards accessing cash today, over drawing a comparative income over an indefinite period, and so there is a risk that some may make poor decisions when preparing for their financial futures, even though they may already be retired.
“Financial education is therefore key to the success of today’s proposals. Our research shows a clear need for DC scheme members for more financial assistance, with three quarters of people needing help just to understand what their likely income will be in retirement.
Financial education is therefore key to the success of today’s proposals”
“Support will be important in ensuring people make the right choices in light of their new financial freedoms.”
17:18 Tara Gillespie, investment consultant at Redington, suggests that the reduction in LTA means some will not be able to reach their retirement income target:
“Currently, a couple retiring at 68 with a £1m pension pot could purchase an annuity that pays £38,000 per year inflation linked, according to the Money Advice Service’s annuity comparison tool.
“The implication of capping the pension lifetime allowance at £1m is that individuals with a final salary of more than £57,000 p.a. will not be able to meet a retirement income target of 2/3 of their final salary from their private pension alone.
Individuals with a final salary of more than £57,000 p.a. will not be able to meet a retirement income target of 2/3 of their final salary from their private pension alone”
“The main concern is the announcement of this limit will disincentivise people from saving enough into their pension, at a time when the nation is facing a vast retirement savings gap. Redington’s Age of Responsibility report revealed that to achieve retirement income targets, individuals would have to contribute 15% a year. However, the projected national savings rate for 2015 is as low as 3.3%.
“Pension policy should be making retirement saving as easy and attractive as possible to help bridge this retirement savings gap, not putting limits on how much people can save in their pension.”
17:13: Daniel Godfrey, chief executive at The Investment Association, called for more stability in pensions:
“We also believe that long-term savings through pensions needs a fair and stable regime. While growing fiscal pressures on levels of tax relief - as well as wider concerns about its distribution - mean that reform is needed, the continuing erosion of tax relief undermines the pensions environment
The continuing erosion of tax relief undermines the pensions environment”
“A new and lasting settlement is needed to encourage consumer confidence in pensions as a long-term savings vehicle, based on effective use of tax incentives at a level that is affordable for the Exchequer.”
17:09: Philip Smith, head of defined contribution pensions at PwC, highlights that the new changes will further widen the gap between DB and DC pensions;
“This reduction means that many employees working in senior roles both in the public and private sector will now have to rethink their pension planning. A long-serving senior civil servant or teacher could now hit the revised LTA around five years earlier than today. We are now effectively looking at a maximum pension of £50,000 per annum from employer-sponsored DB schemes.”
“For DC savers, in the current low interest environment, a £1m pension pot will purchase an inflation-linked income of around £28,000 per year. The level of inequality between DB and DC savers is startling, and today’s announcement makes it more difficult for DC savers to plan for the future.
“Although the impact is restricted to those in more senior roles, many thousands more people will worry that this is a tax on saving, as retirement choices become ever more complicated.”
17:06: Lesley Harrold, pensions lawyer at Norton Rose Fulbright points out that Labour government will now need to find alternative funding if they want to keep their promise to slash university fees:
”Yet more tinkering with pensions tax relief is unwelcome. The LTA has fallen from £1.8 million to £1.25 million in this Parliament and will now fall to £1 million from 2016.
“Although the annual allowance has not been changed in this Budget, it has been slashed from £255,000 to £40,000 since 2010/11, and thus affects many more people than originally proposed when the Finance Act 2004 was implemented.
Ed Balls will need to come up with an alternative funding source if Labour form the next Government”
“However, in firing an opening salvo in the General Election campaign, George Osborne has stolen Labour’s plan to fund a reduction in university tuition fees by a cut in the LTA. Having made this promise, Ed Balls will need to come up with an alternative funding source if Labour form the next Government.”
16:52: Jamie Jenkins, head of pensions strategy, Standard Life questions whether advice will be mandated for those wishing to cash in their annuities:
“By far the biggest announcement on pensions was confirmation that the government has launched a consultation on how a market may be established for people to trade in their future annuity income.
”The proposal would extend this year’s retirement freedoms to over 5m existing annuitants from April 2016. However, the consultation document provides an insight into the many complex issues involved in making this a reality; including taxation, underwriting, valuation and administration.
”It also raises the question of whether advice would need to be mandated, given the obvious parallels with those wishing to transfer out of DB pensions.”
”There is a sting in the tail of today’s announcement for greater pension freedoms. Allowing retirees to draw down cash rather than purchasing an annuity may spread goodwill through the older generation, but there is no guarantee that they will spend it wisely and budget accordingly.
16:43: Geoff Charles, CEO of equity release adviser firm Bower Retirement Services, warns that the freedoms have a “sting in the tail”:
”Put simply, many pensioners may run out of money. We are living longer, and that often means greater care costs, as well as more years of essential living costs like food and heating. Sometimes these expenses can be difficult to predict, and there is a real risk that many retirees will drain their funds too soon.
Put simply, many pensioners may run out of money”
“Pensioners should be given more freedom over their earnings. But a more sensible option would be to help support and encourage alternative sources of cash, like using housing wealth to supplement retirement income, or investing in buy-to-let property as a second income stream.
”We also need more focus on providing quality financial advice to the over 55s, to make sure they are aware of the numerous options available to them, that they are able to live comfortably, and that they can enjoy the retirement they deserve.”
16:38: Karen Barrett, chief executive of unbiased.co.uk, urges those approaching retirement to consult an adviser:
”As much as these pension freedoms are welcomed, it does mean more people are at risk of getting it wrong, especially as the reduction in lifetime pension allowance brings a new group of people closer to the limit.
”It’s clear that taking professional financial advice to help plan for retirement has always offered the best outcomes for consumers, and these extended changes mean that many people who thought their decision-making time was over may be faced with further important decisions to make, for which they are not properly equipped.
It’s clear that taking professional financial advice to help plan for retirement has always offered the best outcomes for consumers”
“The new tax legislation in particular is important – our research earlier this year with Prudential found that £2.9 billion is wasted in pensions tax relief each year, so we know that people aren’t using these vehicles to their fullest. Tax planning is one of the areas in which a financial adviser can make the most difference, so together these reforms should go some way to making sure people are better prepared when they do get to retirement.
“I’m pleased the Chancellor is putting control back in the hands of consumers. We now need to ensure that people understand how to make the most of their money once the ‘safety net’ of annuities has been removed.”
16:30 Andy James, head of retirement planning, Towry warns that retirees should take independent advice before cashing in an annuity:
“In spite of industry calls to leave pensions alone, the Chancellor has yet again taken the opportunity to tinker with the existing system by extending the new pension freedoms to current pensioners, who.- from April 2016 will have the ability to cash in their annuity for a lump sum. Additionally, those currently saving for retirement will see their lifetime allowance being reduced further, to £1m as of April 2016.
There is the very real danger that many will see pound signs in front of their eyes and jump at the opportunity to take the cash”
“While the additional freedoms for those who have not yet retired are a good thing, pensioners should think long and hard – and seek financial advice – on whether this is a worthwhile thing to do.
”There is the very real danger that many will see pound signs in front of their eyes and jump at the opportunity to take the cash. Annuities are designed to provide regular support for the rest of your life, and some of these products are inflation-proof by rising at the same rate as RPI inflation each year – a benefit you will not receive from taking one single lump sum.
“It’s also worth remembering that pensioners with an annuity have already entered their savings into a product which has come at a cost to their retirement funds. To then withdraw this money will trigger a second cost payable to the purchaser. Is it really going to be worth being charged twice?”
16:21: The consultation into the creation of a secondary annuity market has now been published:
Alan Higham, retirement director for Fidelity Worldwide Investment highlights that only a minority would benefit from such a policy and warns that, for most, selling their policy will not lead to better outcomes.
“The consultation document clearly sets out the huge risks involved not only for the annuitant selling their policy but their dependents too. The consent of the original annuity provider will be required and they would appear to have the unfettered right to say no.
“The document itself is not overly optimistic. Having read the detail, it acknowledges that it may not be workable entailing risks for the most vulnerable in society and would deliver poor value in most cases given the significant frictional costs involved.
It will divert scarce resource in Government, Regulators and Industry at a time when it is badly needed”
“We understand that this will be a popular policy but there is really only a minority who would actually benefit, for example, people with expensive debt or surplus income and no capital – there is no cost/benefit analysis performed to show that this policy will offer clear benefit but there are clearly significant costs and risks involved.
“It will divert scarce resource in Government, Regulators and Industry at a time when it is badly needed to successfully deliver existing reforms.”
16:18: ”We will be responding to the consultation and while we welcome the principal of freedom and choice, we question the value of this move as there are risks attached,” says Mark Rowlands, principal at Mercer.
“It’s proven that people place greater value on short-term reward now rather than looking to the long-term. We may see people prioritising short term issues, such as, paying off a loan rather than securing their financial future.
“People typically underestimate their life expectancy by around 5 years and some risk trading their long term financial security for an immediate one-off payment. No one knows how this market would function and what value the consumer will receive, it is hugely risky.”
16:07: Henry Cobbe, managing director, BirthStar Target Date Funds, argues the announcement of more gilt yieds should be good news for DB schemes:
“The increasing supply of long dates gilts should create some slack in the yield curve which will make DB schemes look in slightly better shape. How they actually price them, to a large extent, depends on inflation outlook and government ability to rein in debt.
14:48: Duncan Buchanan, president of the Society of Pension Professionals (SPP) and partner at Hogan Lovells suggest MPs could be hardest hit by the reduction of the LTA:
“For the second year in a row the Chancellor has announced a major change to pensions but unlike last year’s “freedom and choice” changes, which came as a big surprise, this year there was no rabbit in the hat.
Pensioners’ ability to sell their pension income to a third party will be welcomed by older voters”
“Pensioners’ ability to sell their pension income to a third party will be welcomed by older voters but as with any change to pensions the devil will be in the detail. The industry will have to wait for the outcome of the Government’s consultation paper before they can start to adapt to this brave new world. The fear has always been and continues to be that people will run out of money in later life and then regret their decision.
“Away from this headline grabbing change, the Chancellor’s 20% reduction of the Life Time Allowance is likely to impact for the most part those in DB schemes potentially catching a number of MPs! “
15:41: Elissa Bayer, senior investment director at Investec Wealth & Investment thinks that the reduction in the LTA has come too soon:
The pension lifetime allowance limit falling to £1 million is too soon. The industry is still absorbing the previous cut and this reduction will not affect the majority of pensioners given the average UK pension is around £40,000 or less”
15:37: Brian Davidson, senior platform retirement manager at Alliance Trust Savings urged the government to hold a consultation to achieve a sustainable lifetime allowance:
“As a result of the Government’s announcement on the reduction of LTA (albeit indexed to inflation from 2018) we urge them to consider an industry consultation on pension allowances. We understand the need to balance the books but the almost bi-annual reduction of pension allowances such as the LTA simply brings more confusion and complexity to the market.
”We would like the Government to set a challenge to the industry to devise a model of annual and lifetime allowances that is sustainable in the long term and allows individuals and advisers to make long term plans for retirement savings. We believe TISA is ideally placed to rise to the challenge and agree an approach that all political parties can get behind.”
15:34: Ashurst pensions partner Marcus Fink, breathes a sigh of relief that pensions have emerged relatively unscathed from the budget:
“Yet again, the Chancellor could not resist tinkering with pensions tax relief. As of next year the lifetime allowance will reduce to £1m, the sweetener being that it will be indexed by CPI from 2018. Otherwise, the pensions industry is sighing in relief.
The pensions industry is sighing in relief”
”The Chancellor has confirmed, further to last week’s announcement, that pension freedoms will be extended to allow the circa five million who have already invested in annuities to sell them and do what they want with the proceeds subject to being taxed at their marginal rate. A call for evidence has been issued on the establishment of a secondary annuities market with the deadline for responses being 18 June 2015.”
15:23: Commenting on the Chancellor’s decision to increase long-dated gilt issuance, Clive Fortes, partner at Hymans Robertson said:
“The Chancellor’s made a promise to sell more long-dated gilts. This will be welcomed by pension funds looking to deal with the increasing life expectancy of members and efforts to “de-risk” their schemes.
”While it will be welcomed, £100bn of new gilt issuance will not solve the much bigger problem of over £1tn of liabilities.”
15:16: Rosalind Knowles, pensions partner at Linklaters worries that advice requirements around annuities resales could cause a bottleneck:
“It’s estimated that five million pensioners could take up this option. However, it remains to be seen who will purchase these annuities – and indeed how much they would be willing to pay for them.
“The Government is inviting views on how best to help people make an informed decision. If this leads to a requirement for advice similar to what will soon apply to “defined benefit to defined contribution” transfers, then this is likely to lead to a bottle-neck if the option proves popular.”
15:10: Commenting on the Chancellor’s announcement to cut the Lifetime Allowance (LTA) to £1m per annum, and index-link it from 2018, Graham Vidler, director of external affairs, National Association of Pension Funds, said:
“The Chancellor’s commitment to index-link the Lifetime Allowance from 2018 is welcome. But the question remains, what will the LTA be in three years’ time?
“Let’s hope past performance is not an indication of future cuts. The LTA has been cut by £0.5m in the last three Budgets which if repeated would leave an LTA of £0.5m. This would buy an income of around £10,000 per year*.”
Turning to the annuity resale market, Vidler continued:
“It’s vital this does not distract us from or undermine the Freedom & Choice pension reforms due to begin in 19 working days. The Government must make sure this doesn’t divert focus or resource from Pension Wise, damage the broader annuity market or slow down the development of a much-needed market in retirement solutions for those looking to make use of Freedom and Choice from next month.”
15:04: Mark Wood, CEO, JLT Employee Benefits, warns that those heading for retirement have a lot to think about:
Better or worse for pensioners? This year’s reform coupled with those made last year are likely to result in a generation of impoverished pensioners.
“Before reaching for their cider, those preparing for retirement have a lot more to think about since the Chancellor sat down.
- Combination of changes means a married couple can save £190k tax free each year
- £1,000 tax free from savings mitigates the reduction in LTA
- Abolishing 55% penal rate on pension encashment opens up new options
- Auto-enrolment opt-out rates may well jump due to higher basic rate tax threshold
- Auto-enrolment may also be undermined by first-time buyer help-to-buy ISA
- 5m will need to know how to compare a lump sum today with a guaranteed income from their annuity the rest of their life
“For the majority regulated financial advice will be an unaffordable luxury.”
14:57: Steve Wilkie, managing director, retirement specialists Responsible Life, warns that pensioners could lose out by selling on annuities:
“On the surface, it looks like an escape route out of low-value annuities. And being able to gain immediate access to all their retirement money will be attractive to many pensioners - particularly those who bought annuities in the last few years just before the radical pension changes were announced.
“Unfortunately, this is an escape route fraught with danger and booby traps. And for most people, choosing to sell their annuity, however poor it is, could be a case of making a bad deal even worse.
Unfortunately, this is an escape route fraught with danger and booby traps”
“Someone has to be wiling to buy the annuity, and any institutional investor is going to expect to make a profit. That means they’re unlikely to buy the annuity at a fair market value, and the loser is ultimately going to be the pensioner who needs the money the most.
“The reality is, that sticking with what you have, is likely to be a lot better than the cash lump sum you might get if you choose to sell.”
14:51: Following the Budget confirmation that people will be able to sell their pre-existing annuities, Portal Financial highlights research findings showing why people would consider selling their annuity and the minimum they would expect to get for it in terms of a percentage of its real value:
What reasons would you consider selling your annuity?*
- 50% of people surveyed said: “If my annuity was too small”
- 22% said: “If I could use it for a significant purchase”
- 15% said: “If I could switch to an income drawdown policy”
- 9% said: “If I could use it to pass to my dependents”
- 3% said: “Other”
What is the minimum fraction of its real value that you would accept for your annuity if you were to sell it?*
- 66% of people surveyed said: “I’d want 90% or more”
- 13.5% said “I’d want 80%”
- 6.2% said “I’d want 70%”
- 3.5% said “I’d want 60%”
- 11% said “I’d want 50% or less”
Jamie Smith-Thompson, managing director of Portal Financial, said: “Anyone expecting to receive at least 90% of an annuity’s true value if they sell it has unrealistic expectations. We would expect the likely figure to be between 60% and 70% as a maximum, but it could be significantly lower.
“The main worry is the public being left vulnerable to companies trying to rip them off with unrealistic promises. We would like to see some safeguards introduced as part of these measures, such as an independent body with actuarial duties to allow people to see fair values of annuities so they can see exactly how any offer they receive compares.”
14:44: Employers and the pensions industry need to work together to help people to make sensible decisions, says Kevin Legrand, head of pensions policy, Buck Consultants at Xerox
“Care is needed to avoid these new flexibilities being a short term gain at the expense of a long term loss.
A challenge will be to ensure that there is a robust guidance and advice regime”
“The extension of freedoms needs an effective life support system. The common aim must be to assist vulnerable pensioners and employees in making sensible decisions throughout their working lives and beyond.
“A challenge will be to ensure that there is a robust guidance and advice regime, of similar weight to the one protecting transfers above £30K from DB to DC schemes, to protect pensioners.
“The pension freedoms give those nearing retirement - and now those who have already bought an annuity - the chance to make their own decisions. It empowers individuals to choose how they want use their retirement savings, something we’ve never had before.
”However, the removal of restrictions on buying and selling existing annuities could expose yet further people to pension scammers, unless, for instance, the buy-back is restricted to insurance companies. It could also leave people being hit with charges or worse, poorer retirement savings than they had before, by cashing in and making a poor selection without the proper advice.”
14:39: Jason Whyte, Insurance Director at EY, argues that the reduction in the lifetime allowance could clash with pensions inheritance:
“The government has long been concerned with the proportion of pension tax relief that is claimed by higher rate taxpayers, and a further reduction in the lifetime limit is an obvious way to curb it. However, it could clash with the reforms announced in the Autumn Statement allowing dependents to inherit pension wealth tax free, and after the election we may see something more radical such as a flat rate of tax relief for all pension savers.”
14:31: Jeremy Leach, chief executive officer of Managing Partners Limited, says more clarity around the tax treatment of second-hand annuities is needed:
“This initiative is long overdue given that interest – and therefore annuity - rates have been at all-time lows for a record time. It is a fantastic opportunity for those who bought an annuity when it was not their preferred route to seek financial alternatives that are more suitable to their circumstances, including the paying down of debt.
There will be a lot of people who will not be able to achieve the value they want from selling their annuities”
“Annuity sellers could get significant value but a lot will depend on age and health factors. There will be a lot of people who will not be able to achieve the value they want from selling their annuities.
“Tax treatment will need to be clarified. For example, how will the capital gain for annuitants be taxed and how will the income streams for the new beneficiaries be treated given it will be less than the price paid for some time? Regulators will also have to draft new rules to cover transferability rules.
“For many annuity sellers it will be a complicated process though and therefore there will be significantly more demand for financial advice.”
14:24: Ben Roe, head of liability management at Aon Hewitt has called for pension freedoms to extend to DB pensioners:
“Now that members with annuities in payment have access to the new flexibility, the next obvious question is should this be allowed for defined benefit pensioners as well?
“At the moment, DB members need to transfer their benefits to a defined contribution (DC) scheme in order to access the flexibility - and current legislation makes this nigh on impossible for DB pensioners. We know that the Government is intending to consult on whether members should be able to access their benefits directly from a DB scheme, so this provides an ideal opportunity to provide more flexibility for DB pensioners.”
The next obvious question is should this be allowed for defined benefit pensioners as well?
“There are a number of options which could provide DB pensioner members with more flexibility. This could start with providing members with the right to transfer their benefits out of the scheme. As a middle ground it would be possible to allow members to ‘cash out’ the value of the future pension increases. This would ensure that members are left with a minimum level of secure income. It would also provide some protection for trustees and scheme sponsors from the selection risk - (where members in poor health would be most interested in transferring assets out) - which this would introduce.
“However, the key to this - as with any option - is to make sure that members can make a genuinely informed decision – so provision of independent financial advice will be vital.”
14:19: Malcolm Kerr, senior adviser to EY, comments on the 5m people who have already bought annuities who can now sell them for immediate cash:
“Freedom and flexibility to manage your money in retirement should be encouraged, but there is concern we could end up with more people relying on their state pension if personal financial decisions go sour.
”Given the efforts behind auto-enrolment, which was designed to further safeguard people in retirement, this would be ironic.
There is concern we could end up with more people relying on their state pension if personal financial decisions go sour”
”Allowing current annuity holders to cash in their annuity will see the rise of a secondary market, and there’s little doubt it will be a buyers’ market. Advice and/or guidance will therefore be fundamental to help people make the best decisions for their personal circumstances and ensure a financially secure retirement.”
14:11: Simon Chinnery, UK head of DC at J.P. Morgan Asset Management looks at how the increase in income tax threshold can benefit those enrolled within a workplace pension:
“Savers should treat the Budget’s stepped increase in tax free allowances as an opportunity to increase their pension contributions.The best time to increase contributions to savings is when you receive a pay rise and this increase in tax free allowances should be treated in the same way.
”According to the Chancellor, by 2017 an individual could be £900 a year better off when the tax free allowance moves to £11,000. If invested and assuming a 5% per annum investment return over 20 years that could amount to over £32,000 in additional savings for retirement.
The best time to increase contributions to savings is when you receive a pay rise and this increase in tax free allowances should be treated in the same way”
“This is a consideration savers should take particularly seriously. The average defined contribution pot size is £35,600, meaning a median earner has less than a 50:50 chance of achieving an adequate income at retirement from state and private pensions if they don’t contribute more than the minimum required by automatic enrolment, even taking into consideration current plans for auto escalation.
“In addition to this, our analysis has found that the average saver will contribute roughly 7% of their salary to their DC pension plan; and nearly a quarter of these members (22%) may change their contribution rate in any given year. Should they choose to contribute just £2,000 less a year, it is the equivalent of a £165,000 shortfall in retirement (this assumes contributions over a lifetime of work from 22 to 65 yrs).
“There is a ‘pensions crisis’ forming in the UK due to this significant savings gap. Today’s budget has placed pensions at the forefront of peoples’ mind. This further increase in income tax threshold will hopefully act as a catalyst to get people saving more for their retirement.”
14:01: Rosalind Connor, partner in the pensions practice at international law firm Taylor Wessing, said it was by and large an unsuprising budget from a pensions point of view:
“The change to the lifetime allowance was widely trailed so did not come as a surprise. The Chancellor ruled out a change to the annual allowance as it would hit a number of public servants, presumably those in public sector pension schemes and the same could be said of the reduction in the lifetime allowance, which has come down from £1.8m in 2012 to £1m following this budget.
“This will most seriously impact those in defined benefit arrangements, such as the public sector schemes, and those with long service and relatively modest benefits may be caught by this change.
“The change to the tax treatment of decisions to cash in existing annuities was also expected - this is consistent with the significant changes to pensions announced in last year’s budget.
”There had been some speculation that, as pension funds were no longer necessarily to be used to buy a pension, they were no different from other savings vehicles and therefore the tax reliefs might be reduced.
“Instead, the Chancellor has acknowledged this in another direction, and has instead increased the tax relief on other savings with the introduction of the personal savings allowance which ensures that for the first £1,000 of return on savings there is no tax paid, as is the case with returns on savings in a pension scheme.”
13:58: Simon Laight a pensions expert at international law firm Pinsent Masons argues that the cut in LTA is a retrograde step:
“Cutting the lifetime allowance is a retrograde step. It doesn’t just hurt higher earners, it starts to impact on middle England - senior teachers and senior nurses will feel this. £1m doesn’t buy you much of a pension these days.
“It also hurts Defined Contribution savers disproportionately compared to those benefiting from Defined Benefits scheme – for instance civil servants and politicians. This is because the method for measuring DB rights against LTA is more generous. Perhaps politicians should be put on DC savings forthwith so that they understand the impact of tinkering - at the moment, for them it’s just theoretical.
Osborne’s justification – that the cost of tax relief to exchequer has continued to go up in recent years – is misplaced. That’s not a reason to cut how much you can save into pensions. It’s a reason to celebrate the success of auto enrolment. That’s why tax relief claimed has gone up.
“The unwelcome news is partially offset by indexing the LTRA from 2018. That means the allowance should, in theory, stop shrinking over time.”
13:54: Darren Redmayne, CEO of Lincoln Pensions asks whether Osborne has just punted pension risk down the road:
“With the pension reforms announced in the Budget the Chancellor is clearly appealing to the grey vote. The concern is that he has merely punted the pension risk down the road to be revisited at a future date.
“Today’s reforms, while creating additional flexibilities, do little to assist defined-benefit schemes managing record deficits. This has to be the priority of the new Government in May.
The concern is that he has merely punted the pension risk down the road to be revisited at a future date”
“Security in both work and retirement continues to be of paramount importance. Companies are taking longer term views to make good their shortfalls but those with weaker corporate health are exposing their members to a growing risk that their company might not be there to fund full benefits.
“Risk is building up in the defined benefit landscape that this Budget simply doesn’t address.”
13:48: “We do want more people to have flexibility on annuities”, said Ed Miliband in his rebuttal, but he implored the government to ensure people get the right advice. “It’s very important that advice happens quickly. We have rip-off merchants waiting to pounce.”
13:47: Andy Cumming, head of wealth management at Close Brothers Asset Management, argues that more guidance is needed around annuity resale:
“Increased financial freedom at retirement has been a crucial step forward in the last year, but the Chancellor has fired the starting gun on the resale of annuities before we have seen the impact of last year’s reforms. It is a natural progression from the last Budget’s changes, and for thousands of annuitants, the move will be beneficial.
The cost and risk involved in selling an annuity must be made crystal clear to retirees”
“However, it will be vitally important that there will be sufficient guidance for those looking to sell – especially if their current annuity is still the best option, providing value for money and supporting retirement goals.
”Equally, the cost and risk involved in selling an annuity must be made crystal clear to retirees. With questions still unanswered over how Pension Wise will operate and match the predicted demand for April’s freedoms, let alone further changes, much more clarity on the support and protection consumers will receive is necessary.”
13:44: Alan Higham, retirement director for Fidelity Worldwide Investment, analyses the impact of the Chancellor’s announcement on changes to the Life Time Allowance:
“It is very easy to dismiss this as capping excessive tax relief given to very wealthy people. However, if you retired today at age 65 and wanted to buy an inflation-linked pension that continues to pay 50% to your spouse after your death - as is common in public service defined benefit schemes - then this would amount to little more than £26,000 a year income.
”When the lifetime allowance was first introduced in 2006, it was £1.5m and this would have bought a pension of £33,000 or £43,000 in today’s prices.
How will a fall in the LTA impact different sectors?
Civil servants have 2.3% of pay per year as pension up to a maximum of 75% so civil servants paid more than £67,000 could be affected in future or those paid more than £77,000 currently.
Teachers have 1/60th so a long serving teachers with 40 years’ service paid more than £75,000 are affected
Doctors get 1.4% of pay plus 3 x pay as lump sum so long serving GPs or hospital doctors on more than £70,000 are affected
Armed forces those on £79,000 or more are potentially caught which affects Wing Commander, Lt Colonel and Commander ranks and above.
“The tax charge will, therefore, hit the top people in public service such as consultant doctors and senior GPs, most senior civil servants, top head teachers and military leaders. They can avoid the tax by retiring early from age 55 before their pensions hit the £1m valuation mark. There is a risk that we may lose the most talented people too early especially in specialist roles or in Inner London.”
13:38: Steve Groves, chief executive officer of Partnership, comments on the annuity announcements in the budget:
“Interestingly, this year’s Budget contains good news for not only consumers but also for annuity providers. The creation of a well-regulated carefully-designed second hand annuity market could mean that peoples annuities are now more flexible, still guaranteeing an income for life but also able to provide some extra cash when it is needed. It will provide those 5 million older people who have already taken an annuity with a greater degree of flexibility.
It will provide those 5 million older people who have already taken an annuity with a greater degree of flexibility”
“Admittedly, the devil is in the detail and its now falls to the Government and industry to create a safe market which provides real value to consumers. Extending the freedoms to past-annuitants and providing future generations with even more flexibility is simply not good enough unless it has a genuinely positive impact on their lives and this needs to be at the heart of the consultation.”
13:32: Osborne confirms a new help-to-buy ISA.
“For every £200 you save for your right to buy ISA, the government will top it up with £50 more. This is a Budget that works for you. A ten percent deposit on the average first home costs £15K so if you put in up to 12k we’ll put in 3k more.”
13:31: Lots of good news for savers as Osborne announces the FFISA -
“I believe people should be trusted with their hard-earned money. With a fully flexible ISA people will be free to take out and put in their money without losing their entitlement”
13:30: Osborne confirms the removal of the punitive tax charge on sale of existing annuities:
”First, we will give five million pensioners access to their annuity. For many an annuity is the right product, but for some it makes sense to access their annuity now, so we’re changing the law to make that possible.
“From next year the punitive tax charge of at least 55% will be abolished. Tax will be applied only at the marginal rate. And we’ll consult to ensure pensioners get the right guidance and advice.”
13:28: The increase in the personal tax allowance will be welcome for many, but of course it could mean longer before people are auto-enroled.
13:27: Morten Nilsson, CEO of NOW: Pensions says cutting the lifetime allowance is sending a mixed message – save for the future, but not too much.
“Reducing the lifetime allowance will only impact a tiny percentage of pension savers. But, if the government’s long term goal is to encourage people to save a greater proportion of their salaries into pensions, there is a risk of a mixed message – save for the future, but not too much.
“Increasingly, pension reform is being used as a party political tool. While many of the recent changes are welcome and long overdue, pension policymaking should be based on long term objectives and built on consensus – not short term gain. This is why we believe that an independent pension commission could play a crucial role in scrutinising how these reforms impact one another.”
13:24: Whether you’re happy or disappointed with the pensions changes, the good news is you can commiserate or celebrate with a cheaper pint as beer duty is cut again! Hurrah!
13:23: ”We will abolish the annual tax returns altogether”, says George Osborne
13:17: LTA reduction is unfair, unnecessary and unwise says Malcolm McLean senior consultant, Barnett Waddingham
“From a pension point of view it is very disappointing that the chancellor has seen fit to implement a (further) reduction in the LTA from £1.25m to £1m from next year (albeit from 2018 it will be index linked).
“Frankly this is unfair, unnecessary and unwise.
“Although a million pounds still appears to be and is a very large sum of money, which clearly is beyond the aspirations of the average pension saver, it does mean that for a defined contribution pension pot it actually only produces an annual pension of little more than £27,000 (inflation proofed and providing for a spouse).
In my view the Lifetime Allowance is superfluous and unfair”
“In many respects the concept of having a lifetime limit is outdated and unnecessary, now that the annual allowance has been reduced to £40,000 and is the effective controlling mechanism for limiting tax relief on pension saving. The existence of the LTA and the regular monitoring against it overly complicates pension saving at a time when strenuous efforts are being made through automatic enrolment and other measures to encourage saving into a private pension.
It would deprive politicians of the opportunity to tinker with it further for no good reason other than as political tactic”
“In my view the Lifetime Allowance is superfluous and unfair in that it not only restricts the level of tax relief that can be given but also imposes a 55% surcharge on those who perhaps through prudent management of their money and by securing good investment returns have unwittingly exceeded the limit.
“Perhaps the time has now come or at least it is fast approaching where the lifetime allowance should be scrapped, an added bonus being that it would deprive politicians of the opportunity to tinker with it further for no good reason other than as political tactic.”
13:10: We were all expecting the reduction in lifetime allowance, but index-linking from 2018 is a nice surprise and will appease many in the industry
13:07: Commenting on the reduction of the Lifetime Allowance for tax-free pension savings from £1.25m to £1m, Ian Gutteridge, director of Premier, the corporate benefits and wealth management firm, said:
“Hardly a surprise. Most people within the industry were expecting an attack on the LTA. It hits any person likely to receive a pension over £50,000 pa. A clever political move? Who’s going to feel sorry for someone on course for a pension in excess of £50,000? Not exactly a vote loser!
In the past we had “stealth” tax designed to hit people when they didn’t see it coming. Now we have “precision bombing” tax that targets those who are sensible enough to save for retirement at an early age. Now a 40 year old with just over £250,000 of pension savings growing at 5% pa, receiving a 10% annual contribution and salary growth of 3% each year will hit the limit by the time they are 65 years old.”
13:02: A big one for the pensions industry now. Osborne confirms that he will reduce the lifetime allowance from £1.25mn to £1m, saving around £600mn a year. He also announced that to protect savers from inflation the lifetime allowance will be index linked.
”I want to ensure those still building up their pension pots are protected from inflation, so from 2018 we will index the Lifetime Allowance.”
He argued that Labour’s plans to tax pensions to raise £2.9 billion, which would be used to cut tuition fees from £9,000 to £6,000, was fiscally unsound, “rewarding higher paid graduates” and “penalising penalising moderately-paid, long-serving public servants, including police officers, teachers and nurses.”
12:59: ”We have created a fairer tax system, further proof that we are all in this together”, says Osborne.We’re getting more money from people paying the top rate of tax because we understand that backing enterprise means more revenue.”
12:54: The squeeze on public spending will end a year earlier and public spending will increase in 2019/20 in line with the economy, says Osborne
12:47: Osborne announces that he will increase the sale of long dated UK Gilts.
However, Ross Gilliam, a consultant at Instinctif Partners, urges ivestors to remain cautious about UK govenmnent bonds:
“Because of the need to fund the deficit, the UK is increasingly dependent upon foreign capital to keep the books balanced. Given the limited amount of domestic capital within the life insurance and pension industry, the desire of the Government for the industry to pick up the tab for large scale infra-structure projects further reduces the funds available for purchasing gilts.
“Add to that the potential for investors to cash in their pension pots early, and we could face even greater reliance on overseas investors to provide the funding for the UK budget deficit.
“This helps explain why I’m exceptionally cautious about UK government bonds, as failure to attract foreign capital requires a raise in the rate of return in the form of higher interest rates and bond yields, which often drives currency weakness and imported inflation. It also highlights why I continue to see the need for international diversification.”
”In my view it is in the UK’s best interest to remain open and outward looking, especially until the country finds the ability to live within its means. Today’s Budget is a stark reminder that we’re still failing to do that.”
12:44: James Hender, partner and head of the private wealth group at Saffery Champness also joins the growing number of industry experts questioning the lifetime allowance cap:
“While recent reforms to the pensions regime are mostly welcome, the Chancellor seems to be giving with one hand and taking away with the other. This follows a cut from £1.5m just a couple of years ago.”
“A reduction in the pensions limit might increase the desire for the wealthy to create portfolios of buy-to-let properties as they seek to increase their retirement income. This comes at the same time as widespread concern that the younger generation is trapped into renting rather than owning properties.”
12:40: Chief executive of deVere Group, Nigel Green, slams the reduction of the lifetime allowance:
“Another reduction in the lifetime allowance is scandalously counter-productive.
“This pre-election gimmick is a disincentive to save as much as possible for retirement– and therefore it could be harmful to Britain’s long-term economic success.
This move is a slap in the face for those who have worked hard and saved hard”
“With the burgeoning pensions crisis and the looming care crisis, amongst many other factors, we need to urgently revitalise, promote and nurture a savings culture in the UK as a matter of priority. Continually cutting the LTA goes against this concept.
“This move is a slap in the face for those who have worked hard and saved hard, prudently putting money aside all their lives, in order to be able to enjoy their desired retirement. It is a nothing short of a dangerous cap on aspiration.”
12:37: “We choose responsibility! This budget takes further action to support savers and pensioners.”, says George Osborne.
12:32: And we’re off. Just a few minutes behind schedule.
Osborne starts: ”Britain that is growing, creating jobs and paying its way…Britain is walking tall again”
12:23: Back on Twitter, Fidelity Worldwide Investments’ Alan Higham, is hoping for more information around Pension Wise in the budget:
12:15: Will the pensions changes lead to a new crop of buy-to-let investors asks lettings firm Andrews:
12:03: David Page, senior economist at AXA IM, is expecting to see more politically-motivated spending:
“Measures with electoral appeal have been forthcoming in recent weeks. The Chancellor’s extension of ‘Pensioner’ 65+ Guaranteed Growth Bonds (national borrowing at a premium exclusively from wealthy individuals aged over 65) until the week of the election, up to a limit of £15bn from £10bn, is an example of politically-motivated spending. Prime Minister Cameron’s commitment to protect universal benefits for pensioners is another. This Budget is likely to contain more of these measures.”
11:53: Michael Clare, UK director of Aon Hewitt joins the majority in hoping for a bit of time and space as the industry struggles to ready itself for April 6th.
“We are still seeing the effects of the huge changes to the UK pensions system announced in the Budget last year. The key date of 6 April, when those changes come into action, is currently looming large for all those involved in the industry.
For the moment we would ask for a period of stability on pensions tax and some certainty on future annual and lifetime allowances”
“While we would not rule out the possibility of further changes to pensions after the election, for the moment we would ask for a period of stability on pensions tax and some certainty on future annual and lifetime allowances.
”Most of all, we would hope that rather than introducing further significant changes, there will be sufficient time allowed for the measures announced last year to be to be properly settled in and to work correctly.”
11:45: Malcolm Kerr, Senior Adviser to EY, is hoping for clarity not complications:
“This time last year, the pensions industry had no idea of the extent of changes that were on the cusp of being introduced. One year on and it is unclear how ready either the industry or customers are, and there are still numerous challenges yet to overcome.
Worse, of course, would be further tinkering, adding more complexity to the situation”
”Now under a month from implementation, it will be interesting to see if the Chancellor gives some much needed clarity on detailed taxation implications in the Budget. Worse, of course, would be further tinkering, adding more complexity to the situation.”
11:35: Over on Twitter, Charlie Goodman, a financial adviser at Broadstone is hoping Osborne can leave tax incentives alone:
11:30: In Barnett Waddingham’s wishlist for the 2015 budget, Nick Griggs, head of corporate consulting is also calling for a review of auto-enrolment contributions, but one which bears in mind business recovery from the last recession:
“Pensions minister Steve Webb has suggested that the next government should consider “auto-escalation” of contributions to automatic enrolment qualifying schemes. Under auto-escalation, contributions would increase as an employee’s salary increases.
We would welcome the government encouraging members to contribute more”
“The minimum contributions to automatic enrolment schemes are unlikely to provide a comfortable income in retirement. We would welcome the government encouraging members to contribute more. However, businesses need a period of stability in the pensions rules and we would caution against increasing employers’ minimum contributions while businesses are still recovering from the recession.”
11:25: Mark Duke, a senior consultant at Towers Watson asks if the freedoms will be extended to the defined benefit world next?
“There has been no suggestion that retirees with defined benefit pensions will have the same freedom as annuitants to cash them in. The consultation paper might signal how determined the Government is to draw the line here. So far, the trend has been towards extending pensions freedom to groups who originally felt excluded. Choices have been extended to defined benefit members who have not yet retired and now to existing annuitants – will defined benefit pensioners be next? They won’t have choices extended to them in the Budget, but will this be the next step?”
11:18: As we face even more changes to the pensions landscape in today’s budget, worrying research from Octopus Investments reveals the majority of people are still largely in the dark on the changes to pensions set out by the Government a year ago.
Octopus presented 2,000 adults with a series of true statements based on the changes, but found that eight in 10 were unable to indentify them as correct.
Simon Rogerson, CEO of Octopus Investments said: “The upcoming pensions revolution is the biggest shake up in terms of financial planning that Britain has seen for decades. On the back of this, the Chancellor looks set today to hand even more control back to even more people, unlocking a range of options for retirement for a huge number of people.
The vast majority of the public are simply not clear on many of the basic changes that underpin these reforms”
”These reforms are far reaching and have implications on financial planning not just for those approaching retirement but for generations to come. However our findings show that the vast majority of the public are simply not clear on many of the basic changes that underpin these reforms, including the fact that that they can seek guidance on the different choices now open to them.
“While we welcome announcements that give people more flexibility with their retirement planning, it’s clear that both Government and the financial services industry still have a lot of work to do to help people really understand what the changes mean for them and close the knowledge gap that this research has highlighted.”
11:15: Margeret de Valois, an independent pension expert and actuary and also one of Pension Experts top 20 pensions tweeters is also hoping for more stability:
]11:05: Matthew Giles, pensions partner and Head of the Birmingham Pensions Team at Squire Patton Boggs, looks at the possible implications of the removal or reduction of pensions tax relief for high earners
“High earners also tend to be the decision makers within businesses. If pension savings are no longer attractive to them personally they may be less inclined to offer decent pension provision for their employees.
“It also tends to be targeted at so few people that it is more about grabbing headlines than revenue generation. The idea of a flat rate of tax relief (say 30%) for all people whatever their marginal income tax rate (as promoted by the Lib Dems) seems more sensible and would probably generate more cash for the Treasury.”
10:57: Over on Twitter the Balance Wealth team argue that we should scrap Pension Wise alttogether:
10:41 Creating a second-hand annuity market with be fraught with administrative difficulty, says Chris Noon, a partner at Hymans Robertson.
“Creating an open, secondary market for selling on annuities is no small undertaking. The administration of this will be incredibly complex.
“We think it could have similarities to the old endowment policy secondary market, but with much more complexity. The insurer providing the annuity would provide an annuity surrender value, but a secondary market will exist where third parties, for example, other insurers and pension schemes, will compete to buy specific policies.
“The big difference between an annuity and an endowment policy is that the health of the individual has a considerable impact on the value of the annuity. For example, the value of an annuity for a 70 year person with a terminal illness will be substantially less than the value the same annuity for a healthy individual. To allow for this, the market for annuity purchase will need to factor-in underwriting costs.”
10:37: is also hoping for more stability when it comes to pensions tax policy.
“Despite the impact of inflation, the lifetime and annual allowances have been dramatically slashed from £1.8 million to £1.25 million over the last three years. Some parties are saying they will make a further cut to £1 million, or other changes to tax relief.
Pensions are supposed to be a long-term deal.”
“Pensions are supposed to be a long-term deal. A period of stability is needed to allow individuals to better plan for their retirement, particularly as the new flexibilities are introduced. With ever increasing life expectancies pensions are very expensive to provide so further cuts in the lifetime and annual allowances may make it difficult for many members of defined contribution schemes, who would not consider themselves high earners, to save enough to maintain their living standards in retirement. It could also have big implications for long serving defined benefit members who receive a significant promotion.”
10:20: More coherent pension tax policy will be crucial argues Tom Elliot, international investment strategist at deVere Group:
“Investors want a coherent savings and pension tax policy from the government, which it sticks to. Is it a policy objective to encourage personal savings through the tax system? Assuming it is, what is the optimal level of tax incentives? Investors want this published, and have it made clear that pension and savings tax policy follows from this.
“Currently there is a sense that the needs of year-to-year government budget considerations, and vote-pleasing policies, have a more substantial role in the extension or the withdrawal of tax incentives than fundamental policy analysis.
10:00: Jackie Holmes, a senior consultant at Towers Watson thinks the reduction in lifetime allowance could prove problematic for savers, as they cannot be sure whether investment returns will take them over the new threshold.
It would help if the Government could indicate that the Lifetime Allowance will keep pace with prices or earnings”
“One problem with a lower Lifetime Allowance is that more people will have to guess whether investment returns will take them above it when weighing up the case for adding to their pension savings. For example, if someone’s pension pot is already £614,000 and they plan to access their savings in a decade’s time, investment growth of 5% a year would take their pot above £1 million even if they do no further saving.
”Some people with pots much smaller than £1 million could therefore stop saving in pensions on the back of this. It would help if the Government could indicate that the Lifetime Allowance will keep pace with prices or earnings, but the recent trend has been to reduce it further rather than maintain its value.
“Many employers – at least in the private sector – offer cash alternatives to pension contributions for high earners where the Lifetime Allowance makes pension saving less attractive. Where they don’t, employees should think carefully before they stop saving in a pension to avoid a tax charge: even after paying 55% tax, you still get 45% of the value of the employer contribution, and 45% of something is always better than nothing.
“If the Lifetime Allowance is reduced, we expect that the Government will announce transitional protection for people whose pension pots are already above £1 million.”
09:40: Unsuprisingly, many in the industry are hoping simply to be left alone. Tom McPhail, head of pensions research for Hargreaves Lansdown, sums it up rather nicely on Twitter.
09:20: A word from Pension Insight’s editor Louise Farrand:
It’s always dangerous to speculate about what will feature in a Budget announcement. Just look at last year’s. Many people in the pensions industry, expecting pensions to be glossed over, were out to lunch when the biggest changes to pensions in a generation were announced.
This year, chancellor George Osborne has opened his red briefcase early. He has already revealed that the government will consult on allowing people with annuities to sell them in a second-hand annuities market.
The Sun has also reported that the lifetime tax allowance will be cut from £1.25m to £1m.
Perhaps he is hoping that letting pensioners sell their annuities will soften the blow of the cut in the lifetime allowance. Either way, both of the above measures will be most of interest to those already near pensionable age. It’s a shame that thus far, there’s no hint that he will address the issue of getting pensions right for the next generation.
With that in mind, here are three proposals that would comprise a dream Budget announcement for the pensions industry – and for savers.
1. A commitment to increasing auto-enrolment contribution rates
Auto-enrolment is a great idea and thus far is proving very successful. The Department for Work and Pensions’ latest statistics show that 5.2 million workers have been enrolled into a workplace pension scheme as a result of the government’s initiative.
But scheme membership isn’t enough on its own. Members have to build up sufficient savings to be able to afford a comfortable retirement. Indeed, some experts fear that some people will see they are saving into a pension scheme and tick that boring item off their to do lists, without realising that they’re not saving enough to afford a comfortable retirement.
Steve Delo, chief executive of independent trustee firm PAN Trustees says: “It is not charges that are sowing the seeds on poor retirement outcomes, it is a lack of contributions.”
Even savings of 8%, which all employees who have been auto-enrolled must receive from October 2018, won’t be enough. At the moment, the average 20-29 year old contributes 5% to a pension – hardly sufficient.
As Chris Noon, a partner at consultancy Hymans Robertson says, “On average, savings rates for individuals in their 20s and 30s should be around 15% of total pay which is twice the auto-enrolment minimum levels.”
For that reason, the government should commit to a programme of auto-escalation.
It has already worked in Australia, where the average pension pot is around £100,000 at the point of retirement – much more than the average UK equivalent of £25,000.
2. More resources for Pension Wise
It hasn’t even launched yet – but already Pension Wise is under fire. The government’s answer to the issues that giving people unprecedented choice at the point of retirement will create is a free, impartial service about their retirement options.
But Pension Wise has faced industry criticism; most believe that relatively generic won’t be enough to give savers a clear idea of what they should do.
Pension Wise has also been criticised for limited geographical coverage. Tom McPhail, head of pensions research for Hargreaves Lansdown, said: “The geographical coverage looks painfully thin, with retiring investors in Bristol having to travel to Taunton or Cardiff and other areas simply designated as whole counties such as Cornwall or Shropshire; have a look at a map, these are pretty big areas.”
If pensions wise is to be successful, Osborne must commit to providing more resource.
3. Amnesty on trustees and scheme managers who are struggling to keep up with the changes – but can prove they are in the process of becoming compliant
With defined contribution pension funds tasked with reviewing their default funds to make them compliant with the charges cap and suitable for a new generation of savers who won’t necessarily take annuities, the to do list is long.
That’s before even considering the stream of enquiries schemes are fielding about DB to DC transfers, the new pension freedoms, and any changes which will be announced in today’s Budget.
As Delo says: “This last minute regulation fest is a recipe for errors and issues occurring and could set things up for the ‘revisiting and penalising with hindsight’ that always seems to hit our industry.
“Because of the last minute panic, providers and trustees will be struggling to deliver the freedoms in a way that is vaguely intelligible to a normal human being - and in many cases the full choice cannot be offered. If you want to provide a great, confusing environment for con men to prosper, this could be it!”
Leaving scheme members dissatisfied – and vulnerable to con men – is the last thing that the government would want to achieve with its sweeping revolution.
And while some asset managers have responded to last year’s Budget announcement by launching new improved default funds, many offerings are yet to be confirmed. Trustees and scheme managers could be forgiven for wanting to wait until they have a fuller menu of options.
So the final item on my Budget wishlist – which is exceptionally unlikely to be granted – is an amnesty for pension schemes which can prove they are making the changes, but don’t want to rush through an ill-considered set of sweeping reforms, only to have to conduct another review a year down the line.
09:00, 18th March 2015: Welcome to our Budget 2015 live blog. This morning we’ll be looking at the industry’s predictions, hopes and fears. From 12:30pm we’ll be covering the announcement itself, with everything you need to know, as well as responses from industry experts.
Last year’s budget was described by many in the industry as revolutionary. For the first time ever, we saw UK scheme members given unprecedented control over their savings, including taking pensions as cash and access to flexible drawdown arrangements.
With the General Election just around the corner, however, the end may not be in sight. We already know that we will see further announcements around the resale of annuities, and the Sun exclusively announced that George Osborne will reduce the lifetime allowance to £1m. So will we get a long hoped-for period of calm or will it be all change for the pensions landscape again?