Pension simplification: a case of fact or fiction?
In the ten years since A-Day, how far have successive governments been committed to the goal of a more simplified pension tax regime, asks Dale Wadsworth.
Wednesday 6 April 2016 marked ten years since A-Day, which heralded a simplified pension tax regime in the UK.
The objective of introducing this simplified pension tax regime, first announced during the 2004 Budget, was to streamline the number of tax rules which had built up under various governments over the years.
The A-Day reforms included a number of measures that had a significant impact on retirement planning. Pension ‘concurrency’ was introduced, for example, which meant the public had the freedom to contribute to both occupational and personal pension schemes at the same time. This new flexibility around retirement savings was as much a part of the A-Day reforms as simplicity.
Ten years on, it is easy to forget how complicated the pension tax system was before A-Day. However, did the A-Day reforms mark the start of a truly simplified pension regime or has the simplification goal turned out to be more fiction than fact?
Lifetime allowance: highs and lows
The lifetime and annual allowances were introduced on A-Day as a showcase for simplification but the degree of variation around the limits for these allowances over the past ten years has also created a certain amount of instability.
From A-Day, the lifetime allowance stood at £1.5m and the annual allowance at £215,000. Over the next few years, these allowances rose, reaching peaks of £1.8m and £255,000 respectively in 2010-11.
However, following 2010’s emergency Budget cuts were announced to the annual allowance from April 2011 and to the lifetime allowance from April 2012.
The ‘carry-forward’ rule for unused annual allowance was also introduced by the Finance Act 2011, which was designed to protect those in defined benefits (DB) schemes who may see a spike in benefit accrual in a single year because of pay increases – and could therefore incur an annual allowance tax charge under the reduced allowance. The rule was extended to defined contribution (DC) schemes for consistency.
The Act also brought with it the first of the post A-Day fixed protection regimes as a transitional measure alongside the reduction in the lifetime allowance.
During the 2012 Autumn Statement, a further reduction in the lifetime allowance from £1.5m to £1.25m was announced with effect from 6 April 2014, and a further fixed protection regime and a new-look individual protection regime were introduced.
Instead of enhancing the pension simplification regime, it’s arguable whether the introduction of these rules actually diluted the simplification process and indeed, whether simplification even featured as the main objective for these changes.
Pension freedoms: 2014’s surprise announcement
However, Budget 2014 saw the announcement of the ultimate simplification tool by the Chancellor in the form of the pension freedoms. The Government gave pension providers and advisers less than 12 months to prepare for a new pensions landscape from April 2015 which offered:
•unrestricted access to pension pots from age 55
•lower taxes on death
•tax cut on widow’s / widower’s pensions from an annuity.
Interim changes were also introduced with effect from 27 March 2014, with increases to the minimum income requirement for flexible drawdown and to the limits for capped drawdown.
Meanwhile, 6 April 2014 saw the implementation of further reductions to the lifetime allowances and annual allowance, to £1.25m and £40,000 respectively with the introduction of even more protection regimes. During the 2015 Budget, the Chancellor announced further cuts to the lifetime allowance from April 2016, down to £1m with it to be indexed with inflation from 2018-19.
The post-election summer Budget also saw the introduction of the tapered annual allowance, reducing it by 50p in every £1 of income between £150,000 and £210,000 and the realignment of pension input periods (PIPs). Although it could be argued that tapering the annual allowance has only hindered the pension simplification process, compulsorily aligning PIPs to the tax year was a move towards simplification but it came at the expense of complex interim arrangements, the ‘mini-tax years’.
Launch of the Lifetime ISA
If flexibility around retirement savings was as much a part of the A-Day reforms as simplicity, then the Lifetime ISA, announced during this year’s Budget, meets that criteria.
From April 2017, the Lifetime ISA, a hybrid product and not an explicit pension product, will allow young people the flexibility to use their savings for a house or a pension as they choose. It should prove to be a good incentive for under-40s around how they plan for their futures. The question to be answered, of course, is whether they will be able to afford to save into it, with the constant demands on net earnings for the essential needs of living.
More work to be done
Although there has been a trend towards pension simplification over the past ten years with A-Day itself marking real simplification of pension legislation, the tinkering over the past ten years has partially undermined that achievement.
With an aging population and the continued push for fiscal sustainability, the priority for the Government now is to reduce its role in financing retirement and to encourage people to take more responsibility for funding their own post-working years. A truly simplified and stable pension regime in this country would have a real impact on encouraging people to save.
There does appear to be appetite by the current Government to draw a line under the uncertainty and make one further ‘big bang’ reform – although it may come at the cost of drastic change to pension tax relief.
As for the next ten years, with a generation of consumers demanding more value in how they invest and save, a simplified and stable pension regime will help in the development of digital systems that will allow pension providers and advisers to deliver lower-priced products to customers.