What the future holds for pensions has perhaps never been so uncertain. The pension reforms (2015) coupled with general economic conditions, increasing life expectancies and the impact of Brexit have created something of a perfect storm. Nobody can predict the future of pensions with any real certainty but in this post we make an educated guess at what the future may hold.
So what are the key issues the Government faces at present and how do these impact on pensions. They face three key problems:
- Tax revenues
- Defined benefit pension deficits
- Demographic issues
In addition there is a new Prime Minister in place (more on that below) and the impact of Brexit to address which will certainly occupy a substantial amount of Government, Civil Service and Legislature time and effort over the coming months and years. There may be little time (and resource) available for pension reform.
Pensions and Tax Revenue
Any Government, particularly one with a deficit to fund, Brexit to manage and a NHS funding black hole to deal with, will always be on the lookout for any potential tax windfall they can engineer and pension allowances certainly seem to be in the Government’s sights.
The previous Chancellor backed away from major pension allowance changes in the weeks leading up to his last budget but many forecasters predict his successor may return to the issue. It is easy to be cynical about new Prime Minister’s speeches but Theresa May in one of her first speeches said “When it comes to taxes, we’ll prioritise not the wealthy” but the many.
Introduction of a flat rate of pension tax relief instead of the current system matched to the income tax rates of lower and higher earners may therefore be on the way. Some have forecast the Chancellor may set a new flat pension tax relief of 25% or 33% saving the treasury Billions in the process. Changing pension tax relief will have major administrative consequences but it remains a possibility.
It is also widely forecast the Chancellor may cut pension allowances (the amount an individual may contribute to a pension in a single tax year) and / or schedule further reductions to the Lifetime Allowance sometime in the future. All of these measures have been widely criticised as a disincentive to pension savings.
It may be too much of a radical step at this early stage for what is effectively a new Government but LISA (Lifetime ISA) remains a key issue on the horizon. There still remains the prospect in future of replacing all (or part) of pensions with an ISA. This would be a major step that would be strongly resisted by many but the potential short term upside in tax revenue to the Government would be substantial so it cannot be discounted.
The recent problems with the BHS and British Steel final salary pension funds have brought a long standing issue into sharp focus. The long term impact of low interest rates, successive rounds of quantitative easing and, more recently, the impact of Brexit have all increased final salary pension deficits.
There is a possibility the Government will need to legislate to allow some degree of flexibility on how deficits are calculated and / or to facilitate the payment of lower benefits to those in retirement. A green paper will be issued by the Government soon to present the possible options to keep final salary pension schemes sustainable and the debate that follows will be interesting. Any change to final salary pension benefits is likely to be strongly opposed but ultimately there may be little choice.
Of course a change in economic conditions could have a major impact on reducing deficits and some argue the issue is over hyped. Andrew Warwick-Thompson, executive director for regulatory policy with the pension regulator, said recently: “A minority of DB (final salary) schemes and their sponsors are in distressed circumstances but the data doesn’t bear out the argument that in general DB schemes are unaffordable — nor are they about to fail, nor are they about to bankrupt their sponsors, nor will they overwhelm the pensions life raft, the PPF.”
Evidence shows the UK population is ageing. Government statistics show between 2015 and 2020, over a period when the general population is expected to rise 3%, the numbers aged over 65 are expected to increase by 12% and the numbers aged over 85 by 18%
The Government has already normalised the state pension age for men and women at 65 effective November 2018 and increased state pension age to 66 for both men and women effective July 2019 with further rises to 67 (and beyond) starting in 2026. It is possible future Governments may be forced to delay retirement dates further depending on the economic data available at the time.
Notification of previous state pension changes were poor allowing those affected little time to make appropriate plans. There is no guarantee Government will learn lessons prior to any future announcements on changes.
The so called ‘triple lock’ whereby the state pension is increased each year by the higher of the growth in average earnings, the Consumer Price Index (CPI), or 2.5% may also be under threat but ultimately it depends on the inflation rate. With inflation at below 1% for significant periods in recent years the triple lock has become more difficult to justify but with post Brexit uncertainty and the latest inflation figures showing a rise this debate may be delayed.
With the future so uncertain it is important to keep a close eye on pension and tax reform and how it may affect individual circumstances. The potential impact can often be minimised if sufficient time is allowed to make appropriate changes.
The information in this article does not constitute financial or other professional advice. You should not take action on the basis of this article without seeking regulated independent financial advice that addresses your specific circumstances.