Advice firms will need to navigate a number of challenges when advising clients in 2022, including rising inflation; the national insurance increase; the impact of the Lifetime Allowance freeze and the defined contribution scheme consolidation, according to Aegon pensions director Steven Cameron.
Forecasts suggest inflation will average around 4% in 2022. Cameron said: “Rising inflation poses a particular risk for those who hold large sums of money in cash and can disproportionately affect retirees living off a fixed income. The higher inflation is, the greater the stealth impact on limits such as the Lifetime Allowance or the Money Purchase Annual Allowance.”
From April 2022, National Insurance Contributions will also increase by 1.25% for employees, employers and the self-employed and from April 2023, this increase will formally become known as the new Health and Social Care Levy and shown on pay slips. The increase will be extended to those over stage pension age, meaning this group will start paying 1.25% NICs for the first time on earned income.
Cameron noted: “Advisers will need to be prepared to help their clients understand what the increase in NI means for them. It may be that some will see greater attraction to pay pension contributions by salary sacrifice although the rules here are unclear. While this may be of benefit for as long as the extra 1.25% is within the NI system, it may not be possible from April 2023 when it becomes a separate levy.”
Advisers will also need to help individuals assess the risk of potentially exceeding the lifetime allowance, with the freezing of the allowance at £1,073,100 until 2025/26 one of a range of stealth taxes announced in the Spring 2021 Budget. Since then, inflation has risen dramatically, meaning the impact of all frozen thresholds will be felt by more individuals.
According to Cameron: “Advisers have a key role to play in helping individuals assess the risk of potentially exceeding the lifetime allowance, perhaps because of a combination of defined benefit and defined contribution pensions, and then to decide what if any action they should take as a result. This may involve explaining why exceeding the allowance may be better than sacrificing employer pension contributions.”
This year will also see pension providers expected to give a stronger nudge to Pensions Wise when customers ask to access their Defined Contribution pension flexibly. Meanwhile, trustees of smaller single employer occupational DC pension schemes with funds under £100 million will need to carry out annual value for money assessments and on failing, unless they have a sound and prompt recovery plan, will need to wind up and consolidate.
Cameron commented: “Scheme consolidation is a complex exercise and not one to undertake lightly or without professional advice. The Government’s ambition of accelerating scheme consolidation further amongst schemes with funds up to £5 billion will create shortages of such advice and bottlenecks in consolidator schemes’ ability to take on new schemes.
“A tsunami of schemes clambering to consolidate would be highly damaging to the DC market and risks widespread member confusion if significant changes to their retirement funds are not well planned and communicated.”
The FCA is also pushing ahead with its Consumer investment strategy and Consumer Duty, both of which aim to protect individuals.
The FCA currently believes too many people are holding too much in cash and is targeting those with over £10,000 of investable assets in cash, believing those who can accept the risk could be making their money work harder by investing it.
Cameron said: “This is the first sign of the FCA considering a more personalised form of guidance with less regulatory burden than full financial advice. Advisers might want to start thinking about how they may wish to build a more personalised form of guidance into their client propositions perhaps to reach new segments or in workplace situations.”
This year will also see the watchdog plough ahead with its new consumer duty which it describes as a ‘reset’ by aiming to make sure financial services firms have good customer outcomes at the heart of what they do. The final rules are expected by July 2022, with an implementation period running until April 2023, in response to which Cameron says all adviser firms must “get ready to undertake a substantial gap analysis exercise.”
[Main image: tim-graf-ErO0E8wZaTA-unsplash]
