After seismic changes to the pension’s landscape, 2015 looks like being another year of upheaval. Tom McPhail from Hargreaves Lansdown highlights the main issues he thinks investors should look out for.
New Year resolutions
Contact your pension providers and get a private pension forecast. If you’re not on target for an income you’ll be happy with then look at what you can do to change it. Options include increasing contributions, retiring later and making changes to your existing arrangements. Because of a technical change to the Annual Allowance (aligning Pension Input Periods with the tax year), there may be scope to put more into a pension this year than usual.
Get a state pension forecast. There are changes to the state pension happening this year so it is a good moment to look at what you can expect your National Insurance contributions to buy for you.Review your pension investment choices, especially if you have been auto-enrolled into a default fund. Most default funds will not be the best strategy for each individual.
If you are eligible for a workplace pension and you haven’t already joined, then look at doing so; it is free money from your employer. Review your pension charges. Pension products have been constantly evolving; even if it was right for you when you started it, it may not be the best choice now. The government is looking at ways to make it easier and cheaper to move your pension.
Check whether you’ll be affected by impending and potential tax changes (see below). If you’re a higher earner it may well make sense to make additional pension funding ahead of the tax year end. Check whether you should use the Carry Forward rule to sweep up unused pension contribution allowance from previous years ahead of the pension tax review being published.Make sure you’ve notified your pension provider about your wishes for any pension death benefit payments.Check whether you’ll be affected by the drop in the Lifetime Allowance. This could affect your capacity to make further pension contributions after April 2016.Look out for the forthcoming pension freedoms exit penalty review; it may present an opportunity to make a penalty free move from a dormant pension.
Pension taxation
Some changes to the pension tax regime are already on their way, others may be announced on Budget day (16th March).
Already legislated for
Reduction in the Lifetime Allowance from £1.25 million to £1 million. Annual Allowance taper for higher earners, potentially reducing maximum contributions to £10,000
Expected announcements
Review of pension taxation (expected March 16th). Possible abolition (or reform) of pension tax relief. Measures to help investors facing pension exit penalties to access the pension freedoms
State pension reform
On 6th April the New State Pension launches. It is a welcome attempt to simplify the state pension and to distribute pay-outs more evenly however the DWP has got itself into a bit of a pickle over communicating these changes. We’ll also see the end of contracting out for final salary pension schemes. This will result in increased NI contributions for scheme members and could precipitate another round of scheme restructuring or closures. For employees this will mean an increase in their NI of 1.4 percent on incomes between £8,060 and £42,380, the equivalent of up to an extra £40 a month in tax. For employers the impact is even worse, with their NI costs going up by up to £97 a month for each scheme member.
Auto-enrolment
Auto-enrolment will step up a gear, with the steady flow employers going through staging turning into something of a flood. By the end of the year over 500,000 employers will have gone through staging. The last 3 months of 2016 will see an estimated 156,000 employers hit their staging date.
Financial Advice, Guidance and Retirement Outcomes
The joint Treasury / FCA advice and guidance review is expected to report in time for the Budget next March. This could free up access to low cost simple advice and guidance to help people plan their finances. One of the key areas of the ‘advice gap’ is around taking benefits from a pension. The FCA is also looking at this issue and will be publishing further research and guidance on helping and protecting pension investors as the year progresses.
