Pensions News Bulletin January 2015
Three 2014 Pension Acts – Confused? Most people will be.
Reviewing progress of the many pension changes announced over the last year, I found there were three Pension Acts almost falling over each other in the excitement to support the Steve Webb/George Osborne pension revolution:
- The Pensions Act 2014 which received Royal Assent on 14 May 2014;
- The Taxation of Pensions Act 2014 which received Royal Assent on 17 December 2014, and
- The Pensions Schemes Bill 2014 to 2015 going through its third reading as I write.
In short order they cover, among other things, the following:
- The Pensions Act 2014
- State Pension reform and changes to pensionable ages.
- Automatic private pension transfers – pot follows member.
- Bans incentives to transfer away from a defined benefit scheme.
- Abolition of short service refunds. (The under 2 year refund for leavers from occupational DC schemes.)
- Independent Governance Committees.
- Charge cap on auto enrolment defaults and unfair charges.
- The Taxation of Pensions Act 2014
- Ability to take pension as drawdown, payments from uncrystallised funds, or annuity. Annual allowances. Overseas pensions.
- Reduces tax charges on certain death lump sum benefits.
- Inheritors of the pension fund after members death.
- The Pensions Schemes Bill 2014 to 2015
- Makes provision to allow collective (cross subsidised) DC schemes.
- Requires independent advice before transferring from DB to DC to access the new pension freedoms.
- Extends transfer rights beyond a scheme’s normal retirement age.
- Restricts transfers out from unfunded public service schemes to private schemes to access the (cash) new flexibilities.
There are some straightforward issues within this mountain of change but many complex issues too. The flexibilities, opportunities and restrictions will enable more diversification of product and service than ever before. Also look out for the unintended consequences to be expected from such a mountain of speedy change.
The newest pensions risk is running out of money.
The freedom and choice in pensions changes announced in the March 2014 budget (and enshrined in the legislation mentioned above), allows those over the age of 55 to use their pension savings in various ways – cash lump sum, flexible drawdown, continue investing, annuity or a combination of all of these.
That’s a good thing, but it introduces greater risks. It is hoped the guidance guarantee will mitigate the risk by informing people about the choices.
The biggest change is that an annuity, which was compulsory for most retirees, need not be used from April 2015. Complaining about annuities seems to have become a national pastime. Yes, they are expensive by virtue of low interest rates and perhaps the sales margins were too high in some circumstances, but they tended to be expressed badly, particularly in the media and by financial commentators. It is common to hear it said that, for example, £100,000 only buys you £96 a week pension. To most people it seems as if you are spending £100,000 to get something only worth £96. A terrible deal. What those who know better should be saying is something like £100,000 will provide £5,000 a year (£96pw), which will pay you back in 20 years (assuming no inflation protection), and in 30 years would give you £150,000 – 50% extra. That would sound a much better deal and not as misleading. And don’t forget in a workplace pension the employee has only paid for part of that £100,000 pot. More has likely been derived from employer contributions, tax relief and investment return.
The thing about annuities is that they are a secure income. Unlike pension funds, banks and other businesses, annuities are so well secured by safer assets, particularly government bonds, that they don’t go bust and they are guaranteed to pay you for life. That insurance is one reason for being expensive.
From now on it will be attractive for people to take cash from their pension in one go or draw it down as and when they want. This is fine but if people who could afford an annuity could see the future, many of them would forgo the immediate cash and embed an income. In a practical sense we generally find it impossible to imagine ourselves and our lives in older age, and we underestimate how long we are likely to live. A 40 year old sees today’s 90 year old and thinks that’s how it will be for them, but that 40 year old has another 50 years to achieve that age and by then 90 may be the new 60. That’s what history tells us.
I have met wealthy people using pension drawdown who already worry about running out of money because they didn’t realise how much their lifestyle and family commitments in retirement would cost, let alone how long they would live (need an income for). Running out of money for most people will be a disaster, but it will become common unless financial education improves and regular sources of income are valued more.
New Pensioner Bonds go on sale.
On 15 January £10 billion worth of new pensioner bonds paying 2.8% and 4% per annum interest, for one year and three year bonds respectively, went on sale. The bonds are available only for over 65 year olds and were one of the innovations from the chancellor’s March 2014 budget, in which he acknowledged how pensioners have suffered badly from several years of extremely low interest rates on their savings.
I noted the website went down under pressure on the first day and the bonds are expected to sell out fairly fast. Individuals can put a maximum of £10,000 in each bond. Although interest on the bonds is taxable, basic rate tax payers can claim this back from HMRC.
The website and help line repeatedly had capacity problems, but over £1 billion worth of bonds were sold in 2 days to over 100,000 pensioners. Hopefully the service will now settle down and catch up with any backlog.
You can find the website here:
Guidance Guarantee has a brand.
From April 2015 the government committed that every individual able to access the post April 2015 pension flexibilities (cash, annuity, drawdown, or a mixture), would be offered free and impartial guidance to allow them to make confident, informed choices about how to use their pension savings.
The Pensions Advisory Service (TPAS) will be the delivery partner for the telephone guidance channel. Citizens Advice will be the delivery partners for the face to face guidance channel and the Treasury, along with the other delivery partners and the Money Advice Service, will design the digital service for the internet.
The service will be financed by firms that are likely to benefit from consumers who are better informed, and to this end the government will raise a new levy on regulated financial services firms.
Details of the delivery requirements, scope and success criteria can be found here: