Are you on top of pension changes?


Recent years have seen massive changes to the pension environment and it’s not over yet. Robert Cochran of Scottish Widows outlines the impact on individuals and businesses.

About the author

Robert Cochran is a Pensions Specialist at Scottish Widows, an award-winning life, pensions and investment market provider and one of the leading providers of group pension schemes.

Robert Cochran

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

We are in the midst of a pensions revolution, and with more changes on the way, 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"1, as pension freedoms were introduced. Under the plan, people are no longer required to use their pension pots to purchase an annuity and, instead, pension benefits can be taken as cash or in the form of flexi-access drawdown. What perhaps hasn’t been clear, are the tax implications for individuals doing this. The good news is that the mad dash for cash we saw in April 2015 has since dissipated and a more ‘normal’ pattern has resumed.

Spring 2016 will see changes in how much individuals can pay into their pension and still receive tax relief. In practice, this means that 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. Currently they could pay in £40,000 annual allowance and receive tax relief on it. In future, there will be 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. In other words, the amount a person’s fund can grow to without taxation being imposed will reduce from £1.25m (2015-16) to £1m (2016-17). Additional changes to pension tax relief are also likely2.

Key changes for businesses

  1. Auto 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 receiving their staging dates. In addition, the biggest employers are seeing their re-enrolment dates coming around as their three year anniversary approaches.

    The rules governing auto enrolment are fairly 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.3

    According to my calculations, that means that more than £637,000 in fines has been paid by businesses. That doesn’t include those businesses being given escalating penalties at the daily rate of between £50 and £10,000 (dependent on number of employees).4 So businesses cannot afford to bury their heads in the sand when it comes to changes to pensions.

  2. 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.

    The absence of firm retirement dates has big implications for succession planning, as well as productivity. For example, you could have a situation where a member of staff reaches age 55, takes all the money out of their pension scheme and spends it on a trip around the world. They then come back with no money left and have to continue working for you way beyond an age at which they're really productive.

    In-house retirement counselling can be a huge benefit for employees and employers, setting out the financial implications of retirement and taking a more holistic view of an individual’s finances and plans.

Implications for employee benefits

For those businesses with high earners on the payroll, the pensions rule changes mean that those high earners will receive a substantial tax bill if they continue to make large contributions into their pension schemes.

The challenge facing employers is to find an alternative to this not insignificant employee benefit – and that isn’t easy, especially in the face of ongoing change. If, for example, they choose to pay the employee cash in lieu of the pension contribution, the employer will have to pay National Insurance on that. That’s clearly an additional cost to the business.


Stepping up to the challenge

Despite the challenges, and ignoring for a moment the legal imperative of auto enrolment, providing pension benefits for employees is a huge boost to the overall package businesses can offer their staff.

In Scottish Widows’ annual survey of 5,000 individuals, when we ask employees what’s most important to them, pensions usually comes in at second place – beaten only by salary. What we’re seeing now, as a result of auto enrolment making pensions a standard benefit, is that employees are looking to businesses to provide added value services – what’s become known in the US as a ‘financial wellness programme’.

A report from the US shows that those employers who adopt a financial wellness programme typically save $3 for each $1 spent on the scheme and report lower levels of absenteeism.5 That’s the kind of future we’re looking at and here at Scottish Widows we’re already seeing demand for more tailored, advisory and information services from employers, as well as a massive increase in employee demand for guidance and information. For example, we have seen a great hike in the numbers of people accessing digital information on pensions, with one million video views in a two month period and an average 8 minute dwell time on our pension freedoms website.

Staying a step ahead

The real challenge for businesses is the constant change within the pension environment at present. 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 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 adequacy of funding. Those are the issues that individuals and businesses need to focus on.

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