Collective defined contribution schemes? Right to free advice? End of the lifetime allowance? A 30 per cent flat rate tax relief on pensions? If the Budget did not give financial planners and their clients enough to mull over, there have been plenty of announcements to consider since.
With many of these now firmly on the agenda following the Queen’s Speech in June, what, if any, initiatives are likely to progress to actual business-critical issues for IFAs?
Guidance or advice?
At the time, the 2014 Budget was described by some as a ‘Budget for financial planners’ due to the assumption that new-found flexibility at retirement would drive millions of pensioners into the arms of advisers. That may still be the case, but with free, impartial face-to-face advice also being mooted, IFAs are rightly questioning whether they are to be involved or side-stepped.
It is unlikely that product providers will be involved in providing guidance, and some senior insurers have already ruled this out. But free consumer information services such as the Money Advice Service (Mas) and The Pensions Advisory Service (TPAS) could gear up to step into the breach. In a bid to carve out a role for IFAs, the Personal Finance Society (PFS) has proposed a flat-rate fee system designed to engender confidence among retirees in financial planning advice. This could be a step in the right direction but clearly is designed to be complementary to free advice, not an alternative.
That is no bad thing, as any form of ‘advice lite’ or guidance is likely to fall some way short of providing the sort of detailed cash flow planning or product recommendations that individuals at retirement need to make actual decisions.
In that capacity, a complementary service which builds on the free general discussion the client has already had and formulates clear, client-specific plans with product recommendations (and a review cycle) makes perfect sense. Consumers are likely to find that a DIY approach, based on web research and online comparison tools following their free chat, is more complex than they might imagine.
If IFAs can position their service as a cost-effective extension of the free advice that consumers will be offered, they may find clients are willing to pay for the next stage having already established, in broad terms, what they are looking for. Played right, this should be a benefit to IFAs, not a threat.
What is collective DC?
Pensions minister Steve Webb has long been developing the concept of a collective defined contribution system for employers, which was the subject of a consultation in 2013. The idea, taken from existing models in the Netherlands, envisages a hybrid occupational pension that sits somewhere between old-style defined benefit or final salary pensions and new-style defined contribution. Rather than having an individual pot, your savings are pooled with thousands of other workers, which reduces cost and removes the burden for members to manage their own money.
There is also an element of guarantee provided to investment returns. While an improvement on individual DC, collective DC (‘CDC’ – as if we needed more three letter acronyms, or TLAs) does have significant hurdles.
It could be extremely complex both in terms of administering a group DC system and establishing how the investments are managed, particularly if any definition of the word ‘guarantee’ is involved. This means cost and opacity – two concepts that move in the opposite direction from the government’s pension reform agenda.
On top of this, while such schemes have been in place for many years in the Netherlands they have not been universally popular, particularly in recent years as commentators have questioned the fairness of risk sharing on a large scale between generations – which is how they work. CDC is a worthy ambition but is not likely to impact an IFA’s working day any time soon. File under ‘watch list’ until the theory starts resembling practice and leave the day-to-day debate to the pension anoraks (like me).
Tax relief reform
Having reformed almost everything else at retirement, why not change the tax system too? Again, a pet subject of pensions minister Mr Webb, along with other prominent government advisers, pension tax has been widely criticised for favouring higher earners due to its two-tier system. Why should higher earners get larger cheques back from the tax collector than lower earners when they save into a pension?
Webb’s proposition is a flat 30 per cent rate for all, but that begs more questions. Unless income tax bands are also moved to a single flat rate (which is highly unlikely and completely outside of Webb’s remit) that means everyone will receive a different level of tax relief to the actual rate of income tax that they pay.
For many it will be higher than their standard tax rate, for others lower. Trying to work out the maths on all that could take some doing and could involve much scratching of heads come self-assessment time as personal pension savers try to work out what element of relief has been taken at source and what needs to be declared.
Webb has achieved far more pension revolution than anyone would have expected, but this is where the line should be drawn. An interesting theoretical debate, but 30 per cent tax relief is years away and should not concern hard working IFAs.
Scrapping the lifetime allowance, however, is a great idea. Having a limit to the amount of tax-free savings is, as Mr Webb pointed out, ‘illiberal’ and contradictory to the general thrust which is to encourage everyone to save as much as is feasible into a pension. The tax benefits of the lifetime allowance are circular, as the more money that is earned by saving, the more is available to be spent after retirement, at which point it is recycled back into the economy and the overall impact is multiplied.
As a result, the lifetime allowance is a confusing, inefficient tax, the removal of which would be very easy to achieve. The impact could be enormous for IFAs, seeing wealthy individuals pouring cash back into their pensions with no fear of penalising taxes and safe in the knowledge that the money will be readily available in the future thanks to the Budget reforms governing annuities.
If the government takes a holistic approach to its sums, it should find that scrapping the lifetime allowance is in everyone’s interest. This one could be big – IFAs should watch this space carefully.
Conclusion
Overall, taking these and the wider reforms to annuity and drawdown rules together, the direction of travel is favourable to IFAs in theory. But that is only true if IFAs are able to adapt their services, and the marketing of their services, in order to dovetail with the new landscape. By working with a free guidance service, not against it, and providing a full view of retirement options, not just equity-based drawdown, IFAs should be in a position to provide a valuable contribution to the pensions revolution while benefiting from their own business growth.
Key to success will be focusing on the changes that matter, not getting stuck into academic debates that do not.
