2015 has been a huge year for pension changes – but 2016 could also be packed with surprises
This year has been one of huge changes to the pensions landscape.
In April new freedoms were introduced that allow savers to spend their retirement funds how they like. Or at least in theory – in practice, many have found it hard to access their pension pot or have discovered that they have to pay charges to do so.
Next (Other OTC: NXGPF – news) year there are even more changes on the horizon. We already know that the new state pension will be introduced, additional-rate tax relief will be cut and the lifetime pensions limit will be reduced to £1m.
But these scheduled changes may be just the tip of the iceberg. Here we lay out the other likely changes that could affect your retirement savings.
= Cuts to tax relief on pension contributions =
It (Other OTC: ITGL – news) seems highly likely that tax relief on pension contributions will be reduced, or even abolished completely.
The Government launched a consultation on pensions tax relief earlier this year and the Chancellor has said the changes will be announced in the Budget in March.
The consensus seems to be that the rate of relief will be reduced to 30pc from the current “marginal rate” (the highest effective rate of tax that each individual pays, which can be 60pc in some cases but is normally 45pc, 40pc or 20pc, depending on income).
However, it’s worth bearing in mind that pensions tax relief costs the Government about as much as the national defence budget, and the new workplace pension scheme will be increasing this bill every year. As a result, David Smith, head of financial planning at Tilney Bestinvest, the fund shop, said he expected tax relief to be reduced to 25pc.
He said: “The worse case scenario will be the complete abolition of pension tax relief, with pensions in effect replaced with a ‘pensions Isa’. It’s feasible, as the saving to the Government would be gargantuan.”
Alan Higham, founder of pensionschamp.com, said he expected the annual and lifetime allowances to be scrapped as part of the changes.
• How to get the best possible pension in 2016
= Pension freedoms made faster and cheaper =
Following Telegraph Money ‘s Make Pension Freedoms Work campaign, the Government promised to tackle an array of problems that prevented millions of people from using the new flexibilities.
Top of the list were rip-off exit fees, lengthy transfer times and a lack of affordable financial advice.
The Government has launched consultations in each of these areas and is expected to announce new policies next year. Changes could include a ban or cap on exit fees, a cap on transfer times and cheaper financial advice becoming available.
= Pensionable ages will rise =
Currently, benefits from private pensions can be taken from the age of 55. However, rises in life expectancy are putting ever greater pressure on individuals to ensure that their pension funds can last for a very long time.
A number of experts have said the Government will address this problem by setting the age at which you can draw benefits from private pensions at 10 years before state pension age. The link could be formalised with an announcement, possibly next year.
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= Final salary schemes will get less generous =
At the moment, final salary scheme members and their employers pay a lower rate of National Insurance because they are “contracted out” of the second state pension.
This comes to an end in April (LSE: 0N69.L – news) with the launch of the new state pension, so they are all going to experience a rise in their National Insurance deductions (by 1.8pc and 3pc respectively).
According to Tom McPhail, head of pensions policy at Hargreaves Lansdown (LSE: HL.L – news) , the fund shop, one way for pension schemes to reduce the effect of the changes will be to adjust the terms of the final salary scheme, perhaps by reducing contributions or the rate at which pensions build up. This could mean smaller pensions for millions of people.
• Government planning £7bn assault on ‘gold plated’ final salary pension schemes
= ‘Second-hand’ annuity market rules to be finalised =
More than five million pensioners who have bought annuities will be able to swap their guaranteed income for a cash lump sum from April 2017, the Treasury confirmed last week.
The move to create a new “secondary annuity market” is an extension of the Government’s landmark pension freedoms. It is potentially great news for anyone who is stuck with a poor-value annuity. But there are still details about how it will work that need to be confirmed – and these are expected next year.