Newsletter – August 2014


Pensions News Bulletin August 2014

Budget pension flexibility to raise £4bn for the treasury

An analysis of the budget reforms – mainly the ability to cash in pensions from 2015 – shows the treasury expect to benefit by £3.86bn in extra revenue between 2015 and 2020, as 130,000 people a year (up from 5,000 now) take more than the tax free cash from their pensions. The paper from HMRC called ‘Pension Flexibility 2015’ sets out the individual pension measures from the budget so is a useful reference document. However, it goes further and has an impact analysis that will make people wonder about the motive for scrapping the mandatory use of annuities and allowing pensions to be taken as cash.

The ‘summary of impacts’ table shows a yearly revenue analysis which totals £3.86bn over 5 years.

Along with the new pension flexibility are new tax implications. These may be less readily understood by people wanting to maximise their pension cash.

After 25% has been taken tax free the rest will be taxed at the relevant marginal rate, and if a tax threshold is breeched the pension cash will be taxed at the higher rate. So a 20% tax payer who draws down a relatively large amount for any reason could pay 40% or 45% tax. A shock for most people. Spreading the access to your pension account across tax years therefore becomes an important consideration.

Why did the cash freedoms come now?

Was it because….

  • People deserve greater flexibility with their pension and that will make them appreciate them more?
  • The first cohorts of auto enrollers will have too little pension savings for a living pension so allowing cash defuses the ‘miselling’ accusation?
  • It reclaims some of the tax incentives from the accumulation period without most people noticing?

If I was the chancellor I would say the first two are good reasons and the third is a consequence that will benefit the nation.

It does mean there is a great need for employees to be engaged with their pension schemes and that guidance/education/advice is more important than ever.


Why do DC members change funds, what would they do in a crisis and how confident are they about their retirement income?

The report ‘Speaking in confidence’ from State Street is a good (and short) read and attractively illustrated.

It sets out a number of useful stats and case studies looking at UK pensions in age and earning groups. For instance looking at a demographic of age 22 to 34 with annual income £20k to £50k, and with a pension account £2,000 to £5,000, they find 80% think investment in the stock market is only marginally safer than gambling. 60% prefer property or personal investments (eg ISAs) for retirement savings, and 45% lacked confidence in pension provision due to a poor scheme, insufficient time or current lack of savings. 45% of them considered life in retirement will probably be financially difficult.

For 45 to 54 year olds they find that 37% think they will regret not saving more for retirement and nearly 30% anticipate working part time in retirement. 70% of savers currently believe DC will provide less than 50% of the income they expect in retirement.

The paper also looks at investment confidence and tolerance to risk by reviewing how far a pension can fall in a crisis before members feel compelled to make some major change such as paying less or ceasing pension contributions altogether.

While, as expected, the overwhelming majority, 85%, of pension scheme members never change investments but stay in the default fund, the report looks at the motivation for the 15% who do change. See the report here:

2014 Member Survey Findings

A jargon buster may be useful. The report mentions drawdown. Don’t be confused – to pension bods this means a method of taking income from your pension that isn’t an annuity, whereas in the investment world it simply means losses.

Pension Regulator releases latest Automatic Enrolment Registration Report

The Pension Regulator has released its latest compliance report showing 4m workers from 21,000 employers have now been auto enrolled. The report is just two pages but details the information they receive from company’s mandatory registration process. You can see the report here:

Automatic Enrolment Monthly Registration Report


Australia Considers Forced Annuity

Australia’s ‘Financial Services Inquiry’ (FSI) considers forcing annuities amid worries that money runs out in retirement just as the UK abolishes them. What should we learn?

Amongst other areas in the far reaching enquiry David Murray head of the FSI suggests scrapping the freedom Aussies have to cash in their ‘super’ (superannuation / pension). Just as the UK is going the other way and using the Australian model to show it works the Australian authorities can see the policy is storing up trouble.
The pension pool, which is forecast to grow to $5 trillion (Aussie dollars) in 30 years, is not being put to effective use to drive economic growth, and the system is not ensuring pension scheme members are being properly advised to match their investments with their longer term needs. Indeed it is likely that people will deplete their pension pots during their retirement because people are living longer and longer. So Murray’s report suggests either forcing the purchase of guaranteed income products or providing incentives for them.

Availability of good retirement advice is necessary the report says. In the UK as a consequence of the retail distribution review (RDR) it is expected that fewer people than before will be able to source regulated financial advice. However this need not be a concern provided it is understood that the most useful advice in this area need not be regulated. If employers and schemes want their members to understand, how to use their pension schemes and how to consider cash versus income, there is no hurdle stopping them from doing so.

The report can be found here:

Financial System Inquiry Interim Report

It is very lengthy, so the Sydney Morning Herald article is a much shorter read:

Financial inquiry head David Murray ponders advice


Thank you for reading.