How will the Pension Schemes Bill impact savers?
One of the bigger changes to be aware of under the Pensions Schemes Bill is the expansion of inheritance tax (IHT). From April 2027, pensions and death benefits will form part of the deceased’s estate, placing them in the sights of IHT.
The proposed changes as they stand mean that beneficiaries of death benefits face the prospect of paying tax on lump sums and therefore should remain mindful about their tax responsibilities after receiving payments.
While these changes sound negative for the financial wellbeing of savers, it’s important to remember that IHT only applies to estates over £325,000 and this threshold rises to £500,000 where the deceased’s home is passed down to their children or grandchildren.
The percentage of estates that end up paying inheritance tax is overall quite small. However, the changes made by the Bill will draw more estates into scope.
The impact of IHT changes is not limited to the beneficiaries of death benefits. Savers will need to factor the expanded IHT into their own financial planning.
Death in service benefits will be exempt from the IHT changes, and so will death benefits that go to the spouse of the deceased. Where the beneficiary is a child of the deceased, there is no exemption from IHT. Savers may wish to consider the impact of taxation when nominating a beneficiary in an expression of wish form.
Automatic consolidation of small pensions
Since auto-enrolment was introduced in 2012, the number of individuals with small pension pots has risen, with the Department for Work and Pensions (DWP) suggesting that there are now over 13 million pots. The Pensions Dashboard is one upcoming measure to help savers keep track of their pension benefits from across different providers.
The Pension Schemes Bill will bring in plans to automatically consolidate inactive pension pots of £1,000 or less into an authorised default consolidator scheme. The authorised consolidators will be master trusts and for an individual saver with multiple small pots, each would be consolidated into whichever master trust holds the largest single pension pot for the saver.
Automatic consolidation won’t come into effect until 2030 and savers will have the ability to opt out of consolidation. The changes are expected to contribute positively to the financial wellbeing of savers, enabling easier management of pension portfolios, and ensuring small pots aren’t lost or forgotten at retirement.
To protect saver’s pots in this process a ‘best interests test’ will be applied and consolidation of the members pot would only be sought where the saver is made no worse off by having their small pots consolidated.
Value for money framework
The Bill is expected to advance the previously proposed value for money (VFM) framework for defined contribution (DC) schemes.
Pension schemes will have to demonstrate VFM for members by comparing the investment returns of DC funds, costs, and member satisfaction to benchmarks or comparator schemes.
The results of the review will need to be shared with The Pensions Regulator (TPR), which would then publish the results.
In theory, this change should improve saver’s financial wellbeing by making it easier and clearer for them to see when their savings are stuck in an underperforming pension arrangement.
However, whilst underperforming schemes will be challenged to improve their VFM, there isn’t an automatic path for a member of a DC scheme to move to a better performing arrangement.
Where an underperformance has been identified, DC members will need to explore their options and consider whether it is financially appropriate to transfer their benefits elsewhere, or make changes to their fund selection.
Overall, the Bill will be a net benefit to the financial wellbeing of savers, but as it stands currently, savers who express interest and engage with their retirement planning early and thoughtfully will benefit most from the changes.
Supplied by REBA Associate Member, Vidett
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