Pensions News Bulletin May 2017
1. 2017 Election, Conservative pension pledges
The Conservative manifesto has been launched as I write this.
The removal of the triple lock on the state pension, which guarantees it rises by the highest of average earnings, inflation or 2.5% had been widely expected. It is proposed to become a double lock which guarantees state pensions rise by the highest of average earnings or inflation. This is sensible both for long term cost management and for fairness between the working age population and retirees. Besides, once inflation and interest rates normalise it would be hoped that average earnings would rise year on year closer to 2.5% a year anyway.
However in respect of company pensions other manifesto pledges…..
- Tighten the rules against pension abuse and increase punishment for those caught mismanaging pension schemes
- Give the pensions regulator powers to issue punitive fines for those found to have wilfully left a pension scheme under-resourced
- New criminal offence for company directors who put at risk the ability of a pension scheme to meet its obligations.
2. Investment Pension recycling and the Money Purchase Pension Annual Allowance
The Money Purchase Pension Annual Allowance is the new limit on tax relieved pension contributions which was introduced with the pension freedoms reform from 6 April 2015. Starting at an amount of £10,000 a year it was meant to reduce to £4,000 a year from 6 April 2017. This reduction has been delayed due to the unexpected general election taking place in June. This allowance enables new tax relieved pension contributions to continue to be made after you have already started to withdraw the value from an existing defined contribution pension.
Many industry participants as well as the Low Incomes Tax Reform Group advised against this allowance reducing on the basis that it could lead to financial hardship for certain individuals and complicate the governments savings policy in the eyes of the public.
However on balance it is the right thing to do. We should not have been surprised if this particular allowance had been abolished altogether. After all, if you are in the position to use this allowance you were 1) investing in a defined contribution pension, 2) have taken cash or income from it after age 55 and 3) are still wanting to contribute to another pension investment to grow more pension.
Having this opportunity is good for the individual who wants to use but it also means that the government – or in fact the tax payer – having already given us tax relief on the original pension contributions, is now allowing us to take the money out and then put it back into the system effectively getting further tax relief, in other words recycling, but not the ethical version. So even if the £10,000 allowance is reduced to £4,000 its still more tax effective than an ISA which only allows contributions after income tax has been paid.
As for further increasing the complexity of the pension system in the eyes of the public, I’m not so sure. Most people will have lost the will to live trying to understand the pension rules long before they get to the mysteries of the various pension allowances.
3. Defined Benefit Transfers hit record
As the pension freedoms reform from 2015 applies predominantly to Defined Contribution pension schemes it attracts those over age 55 with Defined Benefit pensions, who want to take advantage of those freedoms, to transfer out of their scheme and into a personal pension or defined contribution workplace scheme.
In addition, one of the ways some Defined Benefit pension trustees have decided to reduce their scheme’s liabilities is by offering enhanced transfer values to encourage members to swap their guaranteed defined benefit pension for a large lump sum paid into a personal pension or workplace defined contribution scheme.
More than £25 billion was transferred out of pension schemes in 2016 and at least £19 million in suspected pension fraud was reported between April 2015 and March 2016.
Different pension schemes calculate transfer values in different ways but they can range between values of 30 and 50 times an individual’s projected Defined Benefit annual pension income.
The trouble is, with such large sums being taken out of the Defined Benefit scheme these actions could have a detrimental effect on those remaining in the scheme.
There is also the quite high risk that many of those who transfer out may rue the day they did if the Defined Contribution pot diminishes too quickly either through over spending or poor investment returns and their living standards are severely curtailed in older age. (The Defined Benefit pension would have been paid for their whole life). This could move reasonably well off retired people into poverty.
Pension freedoms and pension transfers are also attractive to criminals and a growing number of people are losing their pension monies to them. Trustees should familiarise themselves with the relevant page and checklist from the regulators website at www.pension-scams.com before they allow transfers to go ahead.
Thank you for reading.