Following a Budget speech light on pensions policy announcements, the industry has been weighing in on what has been revealed, including a consultation on the charge cap and a new tax relief for low earners in net pay schemes, while others say that the chancellor has not done enough to address industry concerns.
Michael Ambery, partner at Hymans Robertson, said that the Budget “failed to adequately address the ticking time-bomb around pension savings, particularly for younger workers”.
He said that the government has missed the opportunity to highlight the importance of planning financially for the future.
“The Pensions and Lifetime Savings Association’s Hitting the Target campaign as part of their retirement living standards outlines the need to increase pension contributions to 12 per cent, and today’s announcement could have been a chance to encourage workers to achieve this,” Ambery said.
We’d like to see the government commit to supporting a centralised campaign with a strong message that pensions and longer-term planning must be at the heart of good financial education
Michael Ambery, Hymans Robertson
“We’d like to see the government commit to supporting a centralised campaign with a strong message that pensions and longer-term planning must be at the heart of good financial education.
“This would help to eradicate the belief that a comfortable income in retirement is easily achievable with current pension savings levels,” he added.
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, noted that it had been “one of the quieter Budgets from a pensions perspective” on the back of several announcements already made throughout the year.
“The pensions triple lock was abandoned, albeit for a year, while income pensioners earn will be subject to a 1.25 per cent health and social care levy,” she said.
“Let’s not forget the freezing of the lifetime allowance for five years, which may seem more benign than a cut but over time will bring more and more people into its net.
“Given this backdrop, it’s understandable no further pension changes were announced today — pensioners already have much to think about.”
DC charge cap worries
But Morrissey was pleased to see the announcement of a government consultation into the defined contribution charge cap.
The government will consult “within the next month” on further changes to the charge cap intended to encourage more investment in illiquid assets by DC schemes.
She said: “There will be appetite to invest in more illiquid assets, especially if it aligns with people’s values of a greener future, and this would prove difficult with the charge cap in its current form.
“We await the full detail, but it will be interesting to see if this may also read across to charges on drawdown investment pathways.”
However, James Monk, head of DC investment at Aon Employee Benefits, noted that “significant work needs to be done on developing the argument behind the value-add of illiquid assets in order to help employers and trusts make these decisions more effectively — and so that providers are not penalised by offering a more expensive, but more sophisticated, investment strategy”.
Former pensions minister Baroness Ros Altmann also expressed concerns about the change, noting that “it is not clear that the charge cap has been the main factor deterring pension funds from supporting infrastructure, housing, private equity and other potentially higher long-term return investments”.
She added: “DC schemes are significantly hampered by the regulatory controls requiring daily pricing and quick transferability of workplace pension schemes if members wish to take their money out.
“Increasing the charge cap does nothing to resolve those problems. This has meant such pensions invest almost nothing in illiquid or long-term projects and focus almost entirely on public markets, which may not be optimal for long-term returns.”
Tax relief complexity fears
Individuals making pension contributions to net pay schemes from 2024-25 will be eligible to claim a top-up, the government has confirmed.
Jessica List, pensions technical manager at Curtis Banks, said that the announcement “won’t end debates about whether the tax relief system needs wider reform, or whether tax relief is even well understood by most consumers”.
“However, giving a boost to many lower earners without them having to change their pension arrangements can only be a good thing,” she said.
“It is slightly disappointing that it appears savers will need to take active steps in order to receive their tax relief. Recent research highlighted that large amounts of higher and additional rate tax relief does not get claimed, so it’s easy to imagine that the same might happen with this process too.”
Becky O’Connor, head of pensions and savings at Interactive Investor, noted that while the new measure “puts right a quirk of the pensions taxation system”, the top-up will only be introduced from April 2024, despite the issue having persisted for many years.
“There is no suggestion it will be backdated for those who have missed out in previous years,” she added.
Minimum age rise concerns
The government has announced that an increase in the normal minimum pension age from 55 to 57 will be included in the finance bill, but its current form raises concern.
One of the principal causes of confusion arises from the fact that protections are in place guaranteeing some scheme members access to their pensions at the current normal minimum pension age of 55, as long as the scheme they are in has this written into its rules.
Draft legislation will give individuals an opportunity to join a pension scheme by April 5 2023, where the scheme rules on February 11 2023 already state that the member has an unqualified right to take pension benefits below the age of 57.
Pensions Expert reported in July on the Treasury’s decision to extend these protections after parts of the pensions industry criticised the initial proposal that members should keep their protected pension age on a block transfer, but not in individual transfers.
Morrissey said: “In their current form, these changes bring complexity to retirement planning and open the doors to the next wave of scam activity, and we had hoped the government would take the time to have another look.”
She added that it is “the perfect opportunity for scammers to crawl out of the woodwork” offering to help people transfer to arrangements with a protected age of 55, while taking a huge chunk for themselves in the form of fees.
ABI calls for govt to 'rethink' normal minimum pension age hike
The Association of British Insurers has called on the government to scrap its “complicated”, “arbitrary” and “confusing” plans to raise the normal minimum pension age “until something fit for purpose” has been developed.
“We’ve been here before with the wave of free pension reviews offered in the wake of the pension flexibilities — we do not need to go back there again,” Morrissey said.
She added that the government needs to look at who these changes are really benefiting and “adopt a simplified approach”.
“In short, there is no benefit to pension savers with this increase, it’s only really pension plans that stand to benefit by hanging on to the monies for an extra two years, but they’re set against it too,” she concluded.
