Martin Palmer – Head of Proposition, Corporate Benefits at Friends Life

The changes to how people can take their pension benefits, announced in the recent Budget, represent a watershed moment for retirement saving. But there’s a good story for employees and employers in the plans to remove restrictions around how people can take an income in retirement.

Improving perceptions

The government’s ambition to give people flexibility and choice when they retire is nothing new. We’ve already seen the need to buy an annuity at age 75 scrapped; the proposed new changes are simply a continuation on this theme, although an annuity will remain an attractive option for anybody requiring a secure and guaranteed income for life. The fact that pension withdrawals from age 55 will be subject to savers’ marginal rate of income tax (rather than the prohibitive 55%) is another reason why the public perception towards pensions should improve.

The logic is quite straightforward. If a savings product is more attractive from a tax perspective and less prohibitive when it comes to withdrawing money, people should warm to it – especially given that employers will also contribute to their employees’ pension plans. And for those closer to retirement, a pension could now be seen as a short to mid-term savings option, rather than being constricted by the view that it’s too late to start saving.

All of this is beneficial for employers who offer a good-quality pension scheme. Employees are more likely to appreciate the value of the benefit, giving businesses a better return on their investment. And while the detail behind the ‘guidance guarantee’ – a commitment in the Budget to provide customers with impartial guidance on retirement choices – is still unclear, the principles should give a level of comfort that people make the right decisions.

Incidental effects

We expect to see, over time, some more knock-on effects for pension schemes. These are not necessarily good or bad, simply part of the continued evolution of workplace pensions as a result of the changes:

• The make-up of a scheme’s default fund could change as monies remain invested for longer. For this reason, traditional ways to reduce risk as people near retirement may be replaced by more diverse investment choices.
• Financial education will need to reflect that the income people build up could be taken at different times, potentially before and throughout their retirement.
• We believe there will be greater synergy between ISAs (with a new, more generous annual limit of £15,000) and pension saving, with people more likely to roll over savings from one product to another.

The last of these points lends itself to the continued growth of corporate platforms or ‘wraps’. Under a platform, online access to a pension, other savings products (including ISAs) and financial education is available to employees in one place. And with sweeping change following sweeping change, these fresh approaches to workplace benefits could be best placed to respond to the future direction of pensions.

For more information, Friends Life’s report on how the changes could affect workplace pensions and saving is available through their LinkedIn group.