It would be fair to assume that anyone sitting down in late 2015 to make forecasts for 2016 might well have failed to predict Boris Johnson’s appointment as British Foreign Secretary or the triumph of Donald Trump in the US.
It would be fair to assume that anyone sitting down in late 2015 to make forecasts for 2016 might well have failed to predict Boris Johnson’s appointment as British Foreign Secretary or the triumph of Donald Trump in the US. So it is with some trepidation that I offer some thoughts on what the coming year might hold. But here goes:
Europe will continue to dominate domestic politics
The outcome of the June 2016 referendum on the UK’s membership of the European Union put in place a series of events which will take years to unfold and which will dominate Parliamentary debate. The Government has promised by the end of March to trigger the ‘Article 50’ process which will signal the UK’s departure from the EU two years later. But there will be much debate as to whether the desired direction should be a ‘hard Brexit’ marking a clean break in our relationship with the remaining EU members or a ‘soft Brexit’ where, for example, we remain active participants in the Single Market. With a slender majority in the House of Commons – and no majority in the House of Lords – the Government may struggle to get its way in Parliament, and the outside chance of a snap General Election to resolve matters cannot be ruled out.
More people will be thinking about cashing in their company pensions
Membership of a final salary occupational pension has long been regarded as the ‘gold standard’. A pension that will last as long as you do, that provides something for your widow or widower, has a measure of inflation protection and is immune to the ups and downs of the stock market remains highly desirable. But with the advent of ‘pensions freedoms’ and with record low interest rates, interest in taking a large cash lump sum in exchange for those pension rights is likely to continue to grow. Whilst staying in a DB scheme will remain the best strategy for many, record transfer values are likely to entice more people to explore the option of a transfer, and regulators need to ensure that advisers are supported in providing quality impartial advice to those who are considering this option.
The Lifetime ISA will further complicate the savings landscape
The introduction of the new Lifetime ISA (LISA) in April 2017 will no doubt be heralded by the Government as a major initiative to support young renters eager to get on the housing ladder. But in practice it is likely to create competition with workplace pensions for younger savers. If young renters have limited spare cash they may well feel they cannot save in two places at once and will prioritise the shiny new product designed to help them save for a deposit. If they opt out of workplace pensions they will lose their employer contribution and possibly break the long-term savings habit over the years when they are building up a deposit. Employers will need to be careful not to encourage younger workers to take out a LISA instead of a workplace pension.
Pressure on the public finances may lead to further efforts to cut the cost of pension tax relief
Every two years since 2010 the Government has cut the Lifetime Allowance for pension tax relief. On top of this, the Annual Allowance has been cut and subjected to an absurdly complex tapering system for high earners. Each of these ‘salami slices’ has been driven by a desire to cut the Budget deficit. With the latest forecasts suggesting that the public finances are in a worse shape post-Brexit, the Chancellor will again be tempted to raid tax relief for further revenue. With the annual ISA allowance rising to £20,000 next year1, the Chancellor may feel emboldened to cut the annual allowance for pension contributions or to look at other ways of reducing the cost of tax relief.
The 2017 Automatic Enrolment review will fail to address the biggest outstanding issues
Automatic Enrolment has been a huge success, with more than six million people successfully enrolled to date, and staying in rates approaching 90%.2 But on average people are contributing far too little to build up a decent pension. And key groups are excluded from automatic enrolment, notably Britain’s 4.79 million ‘forgotten army’ of self-employed people.3 In theory, the Government’s 2017 review of automatic enrolment should address these two issues. It could propose a ‘save more tomorrow’ strategy to get workers beyond the legal minimum contribution rates, and could suggests ways of bringing in the self-employed into something akin to automatic enrolment. But these would both be big and bold changes, and there is a real risk the review will instead focus on small incremental changes.
A prototype pensions dashboard will be a taste of things to come
In the 2016 Budget the Chancellor announced that he wanted the pensions industry to work together to produce a ‘pensions dashboard’ by 2019 where people could see their state pensions, company pensions and private pension rights all in one place. Such dashboards are up and running in many other countries including Australia, the Netherlands, Sweden and Denmark and provide an easy and accessible way for people to see what pension rights they have built up and to plan for their retirement. Since then the Association of British Insurers has been working with a group of pension companies and ‘FinTech’ firms, and a prototype dashboard is likely to appear next spring. This will only be a ‘taster’ version but once the full product is available it is likely to be an important part of people’s financial planning, as well as enabling advisers to focus on giving advice rather than simply gathering factual information about disparate pension entitlements.
1 Gov.uk, March 2016 - www.gov.uk/government/news/budget-2016-some-of-the-things-weve-announced
2 The Pension Regulator, March 2016 - www.thepensionsregulator.gov.uk/press/pn16-11.aspx
3 ONS, Nov 2016 -www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/uklabourmarket/latest
Dec 2016 | AL P8 ON 0013
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