Adviser > News > January 2011 > Con-Demmed Pensions: 2011 – all change please
Con-Demmed Pensions: 2011 – all change please
A quick look at what's happening the pensions market in 2011.
Since taking power in May 2010 the coalition government has carried out a number of reviews and consultations which will result in some significant changes to the pension landscape. A number of these changes will happen this year and even those that don't take effect until 2012 will have an impact.
What effect will these changes have?
New Annual Allowance
Highly paid members of final salary schemes are most likely to suffer from this one, with contributions being limited to avoid additional tax charges.
Most ordinary savers will be unaffected.
Capped drawdown
Existing drawdown clients may have to reduce income at their next review particularly if they are taking maximum income.
Flexible drawdown
Very few savers are likely to have sufficient assets to benefit from this option, but it is a positive move in terms of flexibility.
Lump sum death benefits
Individuals in income drawdown should consider withdrawing income and making regular contributions to the uncrystallised part of their plan to avoid the recovery tax charge.
Default Retirement Age (DRA)
Employers have expressed concerns about this change but it may actually result in their encouraging employees to join their pension scheme so that they can afford to retire earlier.
"Triple guarantee" on state pension
The government's intention was to improve the state pension however prices have in fact been higher than earnings so the effect may well be limited.
Auto-enrolment
Publicity surrounding the NEST launch should lead to more employers becoming aware of the changes and the impact it will have on them.
Reduction of lifetime allowance
Individuals with pension pots that are likely to exceed £1.5m by the time they intend taking benefits will have to consider applying for the higher allowance.
Contracting out
Contracted out defined contribution schemes will no longer receive a contracted out rebate. Members of these schemes may want to reassess the amount of contributions they are paying to their schemes to compensate.
RDR
Both these conditions will take time to put in place. Those advisers who have not yet made a start will have to take some serious action in 2011.
6 April 2011 changes
New Annual Allowance – tax relief on pension savings will be limited to £50K in each Pension Input Period (a policy year to most people). Clients who currently contribute more than this amount into their pension plan are expected to reduce their pension savings to fit within the new limits. On the other hand some clients who are currently affected by anti-forestalling may be able to contribute more after it comes to a welcome end along with the tax year.
Our technical guide provides more information on these changes.
Capped drawdown – pension plans currently known as income drawdown (or unsecured pension USP or pension withdrawal depending on whose literature you're reading) will become "capped drawdown" plans.
Nomenclature apart, the main impact will be:
- a reduction in the maximum income limit from 120% of GAD to 100%, and
- the (re-)introduction of triennial reviews.
Flexible drawdown – a new option will be available to individuals who can meet a minimum income requirement of £20,000. These clients will be able to withdraw unlimited income from their plan and may even take all of it as a (taxed) lump sum.
Lump sum death benefits – a recovery tax charge of 55% will apply to these benefits if either
- the plan has been crystallised or
- the planholder has reached their 75th birthday (even if they haven't crystallised any benefits).
For more details on these changes, read our review of the scrapping of the Age 75 rule.
The Default Retirement Age (DRA) – will be phased out between 6 April and 1 October 2011. Employers will still be able to ask employees to retire at a given age but will have to justify this age on objective grounds to an employment tribunal.
"Triple guarantee" on state pension – the state will increase in with earnings, prices or 2.5 per cent, whichever is highest.
2012 changes
Auto-enrolment – employers will be obliged to auto-enrol all eligible employees into a Qualifying Workplace Pension Scheme (QWPS). The National Employment Savings Trust (NEST), which is designed to meet the auto-enrolment needs of low to medium earners is due to be launched in April 2011.
For more details on these changes, read our guide on the opportunities that auto-enrolment and NEST offers advisers.
Reduction of lifetime allowance – the lifetime allowance will reduce from its current level of £1.8m to £1.5m. Individuals will be able to retain the higher lifetime allowance by applying in writing to HMRC before 5 April 2012, but they will have to stop contributing to or being an active member of any pension plan before that date.
Contracting out – defined contribution schemes will no longer be able to be used to contract out of the state second pension.
2013 changes
RDR – Despite current attempts to de-rail it, the Retail Distribution Review (RDR) is currently still due to be implemented from 1 Jan 2013.
Advisers will have to meet the qualification standards and operate a business model compatible with Adviser Charging.
Our view
Scottish Life welcomes all measures that are intended to promote long term saving and boost retirement planning in the UK.
We also believe a lot of change means a lot of opportunity. Some of your clients will be better off under the new rules while others may need to take action before the rules come into effect.
One thing's for sure, pension professionals certainly won't be stuck for things to talk about in 2011!
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice.
For professional advisers only
