PENSIONSANDSAVINGS.COM

1 December 2014

What will the Autumn Statement announce on pensions, savings and over 50s?

The Chancellor’s surprise Budget reforms last March offered fantastic news for savers. The radical reforms to pensions and more generous rules for ISAs proved so popular, this Autumn Statement can’t possibly provide as much excitement. Nevertheless, more announcements that will impact pensions and the lives of over 50s are expected and I also have a ‘wishlist’ of further reforms that may or may not happen.

Expectations – measures which are likely

• We’ll learn the brand name of the free pensions Guidance service
• Joint life annuities will pay income to widows or widowers tax free
• The FCA may announce the results of its Thematic Review of annuities
• No changes to pensions tax relief
• More spending on infrastructure (it would be great if this could include new incentives for pension funds to invest)

 

Wishlist – measures which are still needed

• Incentives to save for care e.g. Care ISAs that can be passed on IHT free
• New measures to help older workers stay in or return to work
• Rules to ensure pension companies treat annuity customers fairly

There has been so much change in a really short space of time, but whilst the Chancellor is on a roll, he should keep going. Some of the measures he will unveil have already been leaked and others are generally expected. These are the reforms that are likely to be announced:

Guaranteed Guidance brand name to be announced
From April 2015, everyone with a defined contribution pension who is approaching their scheme’s pension age, or who is considering withdrawing money from their fund, will be offered free, impartial Guidance to help them make better-informed decisions. The Treasury has been frantically developing this ‘Guidance Guarantee’ service in recent months, with the Citizens Advice Bureau and Pensions Advisory Service gearing up for launch. The new guidance is meant to be free and impartial and will have its own brand name. The name is likely to be announced this week and there is likely to be a marketing programme financed by the Treasury to promote it and explain its value to pension savers. Establishing a strong, trusted brand is essential to ensuring the guidance is taken up.

Widows and widowers who inherit joint life annuities will be able to receive their income tax free
Changes to pensions tax rules have seen the 55% tax on inherited pension funds swept away and any remaining pension assets can be passed on as a pension, tax free. In order to level the playing field between drawdown and annuities, the Chancellor will announce that any income that is inherited by widows or widowers from their partner’s annuity will also be tax-free. This will help people who have already bought joint-life annuities but will be of no value to those with single life products. Only a minority have bought joint-life annuities up to now, but in future these rules, coupled with the guidance, should help ensure more people cover their partner as well as themselves when buying a lifelong pension income.

The FCA may well announce the results of its Thematic Review of annuities
The FCA has been investigating the annuity market and is expected to announce its findings and recommendations this month. It is possible that the announcement will be made to coincide with the Autumn Statement. I am hoping that the Review will recommend measures to properly protect customers who are at risk of buying unsuitable annuity products. At the moment, there is no duty on insurers to explain in plain English how annuities work, what their risks are and to ask a few relevant questions that would identify potentially unsuitable sales. As annuity sales are still widespread due to pension companies failing to allow their customers to take advantage of the new pension freedoms, the need for a second line of defence for annuity customers is urgent, in particular in light of the fact that once the annuity is bought it can never be changed.

No changes to tax relief
There has been some speculation about changes to pension tax relief, perhaps removing higher rate relief, but I do not expect any decisions to be made. At some point in the next Parliament, this issue is likely to be reviewed, but I would not expect anything to happen imminently.

More spending on infrastructure (it would be great if this could include new incentives for pension funds to invest)
I expect the Chancellor to announce further major infrastructure initiatives and would certainly be delighted if he were to offer meaningful incentives to UK pension funds to encourage them to use their assets to boost the UK economy in this way. Pension funds may need a Government underpin that promises at least gilt yield returns if they commit money to infrastructure projects that do not perform well. That way, the taxpayer would not need to commit money upfront while the public finances are so stretched, but domestic savings could be used to boost both the economy and pension fund returns.

 

More measures still required:

Further measures are required in order to address the needs of the ageing population and improve pensions and savings for the over 50s:

New incentives to save for long-term care – ISA savings set aside for care could pass on free of inheritance tax if not spent
The Chancellor could announce new incentives to help people save for later life care. The numbers needing expensive old age care will grow significantly in future and almost nobody is saving to prepare for this. A new Care ISA allowance would enable people to save in a tax-free environment to provide for long-term care if needed and, if the ISA could be passed on free of Inheritance Tax if not spent on care, then many people might start earmarking their ISA savings for care. The new pension freedoms can also encourage people to leave money in their pension funds to pay for care in later life, however further incentives may also be necessary. A specific tax break for care savings would help focus people’s attention on this vital issue.

Force pension companies to treat annuity customers fairly – reform sales process
There are many ways in which the annuity sales process is failing to ensure customers are treated fairly by their providers. Reforms are urgently required to revamp the way annuities are sold, including the following measures:

• Introduce standard forms written in plain English, to explain annuity products
• Providers must ask basic questions to establish suitability before selling an annuity. For example, if the annuity assumes the customer is in good health, then this must be made clear and the company must ask about their health
• Providers must explain risks of annuities – for example that there is no inflation protection and no partner’s pension if the customer dies early
• The FCA should ban hidden commission and require anyone selling or facilitating annuity sales to declare upfront how much money the customer will pay if buying an annuity and whether independent advice is being given.

New measures to help older workers stay in or return to work
As the population ages, it becomes increasingly important to ensure people are able to work in later life if they want to. Currently, too many people leave the labour market relatively early for a variety of reasons. This premature retirement represents a loss to the individuals as well as a loss to the economy. If more older people stop work they will have lower lifetime incomes and economic output will decline. We have had tremendous success in reducing youth unemployment, but further measures are needed to tackle the problems of older age unemployment as well. There remains widespread ageism in the workplace, but Government could help improve the employment prospects of unemployed over 50s, or help people either stay on or return to work in later life, by encouraging employers to retrain and recruit older people. Apprenticeship and work experience schemes for young people are often subsidised, which has caused employers to ignore older people for such opportunities. I am hoping that there may be increased emphasis on creating work and training opportunities for older people. This is in all our interests. The more older people there are in work, the better their own prospects will be and the better the outlook for economic growth. Old people do not take jobs from the young. Indeed the academic studies clearly show that having more older people in work is associated with higher employment and wages for young people. In my role as Business Champion for Older Workers, I can see the clear need for special interventions to encourage later life working. I have called for ‘mature apprenticeships’, ‘returnships’ and ongoing training for all ages and hope that the Government will respond.