The future of pensions
If, like me, you like to keep abreast with the latest legislative changes that almost seem to be a monthly occurrence at the moment you will have undoubtedly asked yourself the question. “Who came up with these rules?” The argument of my boss and I’m sure many within the industry is “a cleverer man than you”. Though I dispute this whole heartedly, I am sure I am in the same position of many junior corporate pension advisors who sometimes struggle to keep up with the speed of all the changes.
Auto-enrolment seems like a great idea in concept, to force people to save for their retirement so everyone is more comfortable and less reliant on the government when they decide to give up the hustle and bustle for a quieter life. But why, if the government are trying to persuade people to save for their retirement are they lowering the Lifetime allowance and reducing the annual allowance for higher paid individuals? Surely this seems counter productive.
Well not really, if anyone is worrying about the lifetime allowance then they almost definitely aren’t in the demographic that the government are intending to “persuade” to save for their retirement. And restricting additional rate tax relief, you don’t need to be a genius to work out why that one was bought in. So really the announcements made in the July 2015 budget sort of make sense, well they aren’t counter productive to auto-enrolment anyway. The government has even brought everyone’s Pension Input Periods in line! That certainly makes sense. However there seems to be a few things that have been overlooked.
Firstly, how is this going to be enforced and policed? There are several companies who pay their bonuses between January and March, meaning you aren’t going to know how much someone gets paid until near the end of the tax year. So what does the employer do? Set their contributions to £10,000 and mop it up -at the end of the year? There will certainly be some disgruntled senior members of staff who are not best impressed with their pension contributions being a quarter of what they were the previous year. Are employers going to offer a blanket 0% and £10,000 for their senior employees?
Secondly, if someone earning £250,000 a year is auto-enrolled in a 3% + 3% scheme this will mean their total contribution for the year is £15,000. It will also mean their new annual allowance is £10,000, resulting in a tax bill of 45% * £5000 = £2,250. So someone who is automatically put into a pension scheme will then receive a tax bill on contributions they had never chosen to make.
One thing that is certain is people will be looking for alternative forms of investments to save for their retirement. Investment bonds unit trusts and ISAs will all become a much more important part of someone’s retirement plan. With the addition of Corporate ISAs to many provider platforms, will a pension and ISA be viewed as one retirement plan just with different sections? Does this mean companies may contribute to an ISA if your annual allowance restricts the pension contribution that you’re contractually entitled to?
With all of these points to consider I think the next 5 years will be a very exciting time for pensions and financial planning, and an opportunity for both advisors and clients to really look into what works best for them. There are going to be some testing decisions for employers and undoubtedly some innovative investment strategies and retirement options. I personally am looking forward to all the challenges and opportunities these changes will bring, after all everyone needs a plan.