Are you on top of the pension changes?

Pensions have been big news in recent years as the Chancellor seeks to reduce the burden of pension tax relief and the government’s ‘carrot and stick’ policy around pension saving is being felt by both individuals and businesses.

We are in the midst of a pensions revolution, and with more changes on the way. So now is a good time to take stock and make sure you – and your business – are keeping pace.

Key changes for individuals

April 2015 saw what George Osborne described as "the biggest changes to pensions in 100 years", introducing Pension Freedoms. People are no longer required to use pension savings to purchase an annuity and instead can take it all as cash or in the form of flexi-access drawdown.
Spring 2016 sees changes in how much individuals can pay into their pension and still receive tax relief. Anyone earning more than £150,000 a year, including employer pension contributions, will have a reducing allowance of how much they can pay into pensions. Previously, they could pay in £40,000 and receive tax relief. Now there is a sliding scale, which will take them down to a maximum of £10,000 a year.
Individuals will also be impacted by a reduction in lifetime allowances. The amount pension savings can grow to without taxation being imposed will reduce from £1.25m (2015-16) to £1m (2016-17).

Key changes for businesses

Automatic enrolment has been the main feature of pension changes for businesses in recent years, and this is likely to continue. Businesses with fewer than 30 staff will now be reaching their staging dates and the biggest employers are coming up to re-enrolment, three years on from staging.

The rules governing auto enrolment can be complex, requiring integration of HR and payroll systems. However, non-application of the rules can lead to compliance reports and fines.

In January 2016 The Pensions Regulator reported that 4,818 compliance reports have been issued to employers who have failed to fulfil their auto-enrolment duties. In addition, 1,594 fines of £400 have been issued to employers who have not reacted to the first compliance notice.
Age equality legislation means that employers can no longer issue employees with a retirement date. This, and greater uncertainty around pension value and increasing life expectancy, can create workforce planning challenges.

There are big implications for succession planning, as well as productivity. For example, you could have a situation where a worker reaches age 55, takes all the money out of their pension and spends it on a trip around the world. They then come back with no money left and have to continue working for you beyond an age they would have wanted.

As such, in-house retirement counselling and employer-arranged advice can be a huge benefit for employees and employers, setting out the financial implications of retirement.
It was announced in the 2016 Budget that income tax and NI relief for advice arranged by employers will go up from £150 to £500. The details and timings of this are being worked on, but the recent Financial Advice Market Review acknowledged there was too much complexity in the current system which contributes to the under-use of the allowance.

Let’s hope the rules around the £500 allowance are more straightforward so more people can benefit from advice delivered through the workplace.

The changes should help employers make affordable advice available to their workforces. This is increasingly important given the flexibility workers now have in how to take their pensions, but could also be significant in earlier stages of financial planning, taking a holistic view of an individual’s finances while maximising growth of pension savings.

Staying a step ahead

The real challenge for businesses is the constant change within the pension environment. To keep abreast of these changes, businesses should:

Read the information provided by the regulators.
Maintain dialogue with advisers and pensions providers.
Engage in regular governance meetings.
Inform advisers and pensions providers of changes in the workforce or new technology that may impact delivery of pension benefits.

There’s a lot of granularity around pensions, but the big issues are around tax regulation, changes to allowances and employer duties. Those are the issues that individuals and businesses need to focus on.

Robert Cochran is senior corporate pensions specialist at Scottish Widows.