A lot happened to pensions last year, most of which occurred or was announced in three distinct chunks.
April – Freedom and choice in pensions
The most seismic change was the wholesale change to retirement options, in particular the ability for savers to cash in their pension fund from age 55 and take the proceeds as an unlimited lump sum.
This has, unsurprisingly, proved to be very popular resulting in pension providers paying out around £2.5bn to customers as lump sums over the first six months since the introduction of the changes on 6 April 2015. Increasing amounts, £2.2bn in the same period, have also been paid into drawdown plans, while £1.17bn was paid into annuities, according to Association of British Insurers statistics published in October 2015.
Concerns about people squandering their pension funds appear to be largely unrealised. The average value of funds being withdrawn to date is relatively low, at £15,500, and the majority has been paid to individuals aged under 60. Arguably these are exactly the people who would benefit more from a lump sum than a lifetime income.
Royal London’s own research shows that almost three quarters (71 per cent) of customers who cashed in their pension fund had other pension funds which they could rely on in later life.
July - Summer Budget
The all-Conservative government wasted no time in publishing an interim Budget which included the announcement of a consultation on pension tax relief, ostensibly with the aim of creating an incentive for people to save more. The potential for the Treasury to make savings on tax relief is a bonus.
We now know that the government’s response will come in March this year.
Unfortunately the Budget also confirmed the introduction of the tapered annual allowance, due to be implemented in April this year for those earning in excess of £150,000. This is an added complexity that, along with a reduction in the Lifetime Allowance, restricts rather than promotes saving. There’s always an exception…
November – the Autumn Statement
Pensions were left relatively unscathed in the Autumn Statement. The most significant announcements were confirmation of the maximum income payable under the new State Pension in 2016, and the announcement that the scheduled increase to minimum contribution rates under automatic enrolment will be delayed by six months.
In the context of reform, the new flat-rate State Pension should make it easier for people to find out what they will receive from the State and whether it is likely to be enough to meet their needs. Automatic Enrolment will help to cover any shortfall in income at retirement and the short delay will hopefully not detract too much from getting people saving. Indeed, it may reduce the number of people opting out at a later stage if the increases are more likely to coincide with salary increases.
