As Curtis Banks celebrates its 10thyear as a SIPP & SSAS provider, chief executive Will Self looks at 10 key UK pension changes over that period and how they have and are impacting financial planning for clients.
Curtis Banks celebrates its 10thanniversary in June. It’s been a busy ten years for us, and even more so for the pension industry as a whole. Below we’ve taken a look at ten of the key pension changes since 2009, the effect they’ve had in that time and the effect they may still have going forwards.
1. Lifetime allowance changes
Back in June 2009 the standard lifetime allowance was £1.75m, having increased by £250,000 in the three years since it was introduced. The allowance was high enough for most people’s requirements and still increasing, and the protection situation was relatively straight forward as well, with only enhanced protection, primary protection, and the enhancement factors to consider. Since then the allowance has reduced in both size and popularity, and increased only in complexity. There are now eight forms of lifetime allowance protection to consider and a host of transitional measures to cater for the three drops in 2012, 2014 and 2016. It’s become a firm staple on industry wish lists of rules to scrap.
2. Annual allowance reduction
Back in 2009, the annual allowance of £245,000 was much higher than almost anyone needed to use regularly. However, it allowed people to make larger tax-relieved contributions when their circumstances allowed, without having to take any special measures. The drastic drop in the allowance from £255,000 to £50,000 in 2011 marked a shift in the way the annual allowance was seen and used. The number of people reporting that they had exceeded their annual allowance on their Self-Assessment forms increased from 140 in 2010/11 to 5,570 in 2011/12, showing just how wide reaching the effect of this change was.
3. Introduction of carry forward
The annual allowance rules have changed so much over the last decade that we thought measures such as carry forward counted as key changes in their own right. Carry forward was introduced in 2011 and was intended to soften the blow of the £205,000 overnight reduction in the annual allowance, allowing savers some flexibility to make occasional larger tax-relieved contributions. Nowadays, it’s often used by people who are subject to the tapered annual allowance and unable to calculate their exact allowance until it’s too late to contribute that year.
4. The tapered annual allowance
Life was much easier for high earning pension savers in 2009: the annual allowance was far higher and there was no such thing as the tapered annual allowance. It was designed to limit the amount of tax relief going to high earners, and early data shows that it is working: the overall cost of tax relief is staying broadly the same despite the vast number of extra pension savers introduced by auto-enrolment. The taper is arguably one of the most contentious rules on this list. Firstly, there’s the debate about whether it’s fair to restrict tax relief entitlement at the time when the saver is most likely to be in a position to save for their retirement. Then there’s the rules themselves, which require savers to know the exact value of all sources of income before the end of the tax year, in order to set the allowance for that same year. There are frequent calls for the taper rules to be scrapped, or at the very least amended to be less onerous.
5. The money purchase annual allowance (MPAA)
Yet another annual allowance related change, and the first on our list relating to the pension freedoms changes of 2015. In 2009 it was much less common for someone to consider accessing a pension when they might still want to pay into one in the future; however, if the situation arose there were no additional restrictions in place. The general consensus is that the MPAA was introduced to solve an issue which was never proven to have existed: would vast swathes of over-55s really have re-routed large amounts of income through a pension to save on National Insurance and some of their income tax? Instead, the MPAA gives those thinking about a flexible retirement something else to consider, and so far mostly seems to have caught out people who used the pension freedoms long before their intended retirement simply to exhaust a small pension rather than transfer it.
6. Drawdown changes
Perhaps we should have called this section ‘income withdrawal changes’, as back in 2009 there was technically no such thing as drawdown. There was, however, unsecured pension and alternatively secured pension (for over 75s). 2011 saw the move to capped drawdown and the introduction of flexible drawdown, with some suggestion now that flexible drawdown was a way of ‘testing the waters’ for the pension freedoms with a select group of consumers. Of course, the key change to drawdown came in 2015, when flexi-access was introduced as one of the key pension freedoms rules. Allowing all savers unlimited access to their drawdown pensions was a fundamental change and has had far reaching consequences over the past four years.
7. Age changes
2009 was one of the last years in which a 50-year-old could access their pension benefits, as the normal minimum pension age increased to 55 in April 2010. More significantly, perhaps, the requirement to take benefits by age 75 was removed in 2011. This seemingly small change was perhaps too small, as it left behind residual complexities still present today, such as the requirement to test benefits against the lifetime allowance at age 75 even if benefits aren’t taken at that point.
8. Death benefits transformation
The 2009 death benefits rules for defined contribution pensions are almost unrecognisable from today’s. In 2009 only dependants had the option to hold inherited funds in drawdown, there was little-to-no intergenerational planning opportunities, and the tax charges on death benefits were often higher than they are today (although not quite yet at the 55% peak between 2011 and 2015). The pension freedoms transformed death benefits into a major part of the pension planning process.
9. Pension freedoms
We’ve mentioned several individual elements of the pension freedoms already, but the overall effect of those changes, coming all at once in 2015, can’t be underestimated. The freedoms drew unprecedented attention to pensions: not only did the new rules change the way people thought about their retirement savings, but attention was also drawn to existing options which weren’t previously well known. For example, one of the most popular actions among consumers since the freedoms is to access tax free cash without taking income. The freedoms gave more flexibility to consumers, but also exposed them to greater risks. Today there is much greater focus on the risks of scams, unsuitable products or investments, and ensuring consumers fully understand their options and are making suitable decisions.
10. Auto-enrolment
Of course, it would be impossible to talk about pension changes over the last ten years without mentioning auto-enrolment. In 2009 auto-enrolment had been suggested and was in the process of being put in place, but it was only in 2012 when the process began. Today auto-enrolment is fully operational, with the last currently-planned increases to the minimum contribution levels having been implemented. With millions of new people saving into a pension for the first time and opt-out levels at a reasonable level, attention going forward will no doubt focus on whether to widen the provisions to include more people, and whether the minimum contribution levels should be raised further.
10 years after
Back in 2009, no one could have predicted how different the pension landscape would look only a decade later. In the context of retirement saving ten years should not be a long time, and yet today’s rules inspire vastly different attitudes towards pensions saving and retirement among consumers and the industry alike. Many of these changes are also still evolving, and it’s likely that their effects will help shape the next ten years of pensions as well.
