September 2016 - Newsletter
Brexit pension shortfall risk
Since the EU referendum on 23 June, experts have concentrated mostly on what they believe will be Brexit’s effect in killing off remaining final salary pension schemes, which guarantee a proportion of an employee’s final salary as a pension. The deficits of final salary schemes increased by tens of billions of pounds as a result of the vote.
Hymans and other City firms now say the far larger numbers of workers in defined contribution schemes must face the challenging post-Brexit choice of either having to pay far more into their pensions, or accepting lower income in retirement, or working for longer. Calculations used by the DWP advise that someone on an average salary of £30,000 would need a pension of £20,000 to sustain their standard of living, having taken into account their reduced costs in retirement. Someone who retired on a salary of £70,000 would need around £35,000 a year.
The breakdown in interest income and people living longer has wrecked the finances of Britain’s final salary pension schemes since the financial crash in 2008, and rising life expectancy and a decline in investment returns from 2000 onwards have created enormous funding shortfalls. Unlike on the continent, Britain has relied on private pensions to top up state pensions to provide workers with a sufficient retirement income. If, as many expect, the UK’s GDP turns out to be significantly lower than it was predicted pre-Brexit, then previous projections for the new state pension will prove to be excessively generous.
Salary sacrifice update
The Government has long been concerned about the escalating cost of the scheme, and subsequently announced that the tax benefits would be curtailed.They will be removed for all uses except employer pension contributions, employerprovided pension advice, employer-supported childcare, provision of workplace nurseries and bicycles and helmets under the Cycle to Work scheme. The scheme will therefore no longer be beneficial to workers taking out a smartphone contract, buying a car, taking out private medical insurance or health screening or buying items such as TVs computers and white goods.
The use of salary sacrifice rose by a third between 2009/10 and 2014/15, gaining in popularity because it amounts to a saving both for employers and employees. It was never an official Government policy involving a 'giveaway' to workers, but has rather grown up ad hoc over the past 20 years as a result of employers looking for ways to minimise their NI bill, and co-opting workers eager to take up rewards into the process.
As it stands, there are no limitations on the uses of salary sacrifice. However, with the cost of the scheme hitting as much as £5billion a year, the Government is poised to rein in its use.
Final salary pension transfer requests upped
"Final salary transfers have long been seen as a taboo, but the subject has been thrown into much greater focus since the pension freedoms were introduced," said Retirement Advantage pensions technical director Andrew Tully.
"Many schemes are currently offering transfer values higher than the historic average and, as a result, advisers have been able to match the benefits from the final salary arrangement using an annuity, leaving a residual fund available in drawdown." He added: "This can be easily done through one product using new hybrid solutions, creating additional flexibility, better death benefits and tax-planning opportunities compared with a final salary pension. "The ability for family to inherit the remaining pension fund free of inheritance tax is a strong driver for some, compared with the often poor level of death benefits available for someone who has left their final salary scheme."
Inheritance tax has proven to be a key factor in the growing number of transfers away from defined benefit schemes. Prudential research found 64% of advisers have seen clients change retirement plans as a result of Osborne's IHT reforms. Furthermore, IHT receipts have hit record levels since the reforms were proclaimed in April 2015.
As interest in DB transfers develops, the Financial Conduct Authority is currently assessing the redress methodology used for pension transfer advice, which was originally developed for the Pensions Review of the 1990s. The regulator has said it intends to consult on changes to the current methodology in the autumn. The long-term viability of DB schemes has also been under scrutiny by MPs on the work and pensions committee and it is expected to launch a probe into the schemes.
We are pleased to announce that Robbie Wilders has become a permanent member of the team. Robbie is passionate about music and sport. He also supports Chelsea FC.
Matt Hazledine has joined the Board of Trustees of the LSN (Lymphoedema Support Network). This member funded charity provides guidance and support to those suffering with this life changing condition. Visit www.lsn.org.uk for information.