As we approach our business financial year end, I have been reflecting. Sometimes it feels change comes at overwhelming rate and the last 12 months, starting somewhere around the time of Russia’s invasion of Ukraine, feels like such a time.
What is more, as the eighth anniversary of pension freedoms approaches, I have also been thinking about both the good and bad outcomes of these changes – the most rapid evolution I recall of how it was to be a retirement specialist.
Pension freedoms and historically low interest rates created the environment for industrial scale misselling of DB transfers
It seems reasonable to assume the changes introduced in 2015 have been a success for HM Revenue & Customs, with income tax on “flexibly accessed pensions” at a rate higher than it would have been without the introduction of flexi-access drawdown.
There is an apparent tax advantage now for wealthier people, with the ability to pass on their pension free of all tax but this is niche. The reality is that most wealthier pensioners, especially those who are married, will not pass on pension wealth before the age of 75. For that reason, it will be taxed on the recipient when they draw down.
The psychology of leaving more pension wealth unspent may actually increase revenue even if the tax is paid at 20% income tax rather than the ostensibly higher 40% rate of inheritance tax.
The events of 2022 – specifically the rapid increase in interest rates – have brought annuities very much back to the fore.
Pensions have been hammered by successive governments, most recently by chancellor Jeremy Hunt
True, for some advisers they never really went away, but they become a more viable mainstream solution, as opposed to principally being suitable for the risk averse, covering more than just client “need”, and erode some of the previous death benefits of drawdown with guaranteed periods higher than was permitted prior to 2015.
Pension freedoms and historically low interest rates created the environment for industrial scale misselling of defined benefit (DB) transfers.
There is an assumption this is behind us, with the well documented issues and subsequent redress, particularly with respect to the British Steel Pension Scheme (BSPS). But I still believe this is the tip of the iceberg. We can only hope the lower cost of a guaranteed retirement income reduces the impact of losses to these individuals.
The Financial Conduct Authority, on several occasions, and as recently as late-2022, have encouraged firms to review their files with respect to DB transfer advice to identify issues that may have led to unsuitable advice. However, I think the perception is either that the issues are restricted to BSPS, relates to firms other than the recipients of these letters or both.
Pensions have been hammered by successive governments, most recently by chancellor Jeremy Hunt.
The layering of tier upon tier of legislation means the need for our services has never been greater
While not explicit, the lifetime allowance seems to be frozen indefinitely. I suspect it will now be treated as the inheritance nil rate band has been for nearly two decades. The annual allowance for high earners has become trivial in a series of successive cuts. It’s only due to the wish to appease NHS workers that we have seen a small concession in the rules since 2015.
So, despite the significant planning opportunities for wealthier, older clients, pensions will form an increasingly lower proportion of retirement plans. This is clearly deliberate – these wealthier people will not financially struggle in retirement but they will need to save more and get their savings to work harder for them.
Which, all in all, is a net positive for us advisers who specialise in retirement planning. The increasing complication of the retirement regime, the need to consider a variety of strategies, and the layering of tier upon tier of legislation means the need for our services has never been greater.
The other side of these changes, punctuated by the events of 2022, specifically the rise in the risk-free rate of return, is that, over the longer term, investment theory tells us we can expect a greater return for our clients. This is not a new world. Those of us who have been practising for a couple of decades will see the investment outlook to be more typical of history, with the past 15 years being the anomaly.
We clearly have a recession to weather before we return to “boom” times but despite the spectre of these pension issues remaining unresolved, I remain positive for the future.
Alistair Cunningham is financial planning director at Wingate Financial Planning
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