The 2016 pension landscape will undoubtedly be dominated by the government’s response to the consultation on pension tax relief, and it will be extremely difficult for anyone involved in the market to make significant plans before this is published in March.
Changes to pension tax relief
In theory nothing is off limits. The result of the consultation could be anything from turning pension tax relief completely on its head to no change at all.
1. A change to TEE
If the government were to alter pensions tax relief from an EET (contributions exempt, fund growth exempt and benefits taxed) system to one that is TEE (post-tax contributions, exempt fund growth, exempt benefits), every pension provider and every employer would have a massive task to implement changes to their systems.
2. Retain EET but alter the rates of relief
Current systems are entirely based on the individual’s tax position whereas a flat rate would require a different set of parameters entirely.The workload for providers and employers would not be as great as the first change but could still be considerable, particularly if a flat rate of tax-relief is introduced.
3. No change
Most pension experts do not expect this outcome. But even if there is no change pension companies will need to improve their communications with ordinary savers.
Unfortunately, the ability to do this properly will be limited by the number of other changes planned for next year, so any improvement may not be seen in 2016.
Providers’ current position on this issue could best be described as “on stand-by”. Given the potential size of the task, and the uncertainty of outcome they are unlikely to commit any resources to the task at present. Come March it will be all-hands-to-the pump.
Other key issues
The Financial Conduct Authority’s response to its consultation into the provision of financial advice, the Financial Advice Market Review, will be published just ahead of the March Budget.
Quick fixes are unlikely but continued investment in technology will almost certainly form a part.
We are likely to see the launch of many new planning tools and apps which advisers can make full use of in order to deliver a cost effective service to a wider range of clients.
The focus will be on those with smaller assets and lower savings than the traditional adviser client and new business models,which reduce the number of tasks carried out by fully qualified advisers.
Exit penalties
Providers may also face extra costs if the FCA decides to impose a cap on exit penalties, and it is difficult to see how this could be compensated for, except by an increase in charges elsewhere.
Any losses would ultimately affect the consumer to some extent and it is to be hoped that the impact will not be too great.
FCA figures show that only 3.6 per cent of policyholders over the age of 55 face an exit penalty in excess of 5 per cent, with a further 4 per cent facing a penalty of between 2-5 per cent. It would seem reasonable that any cap should be set somewhere in this region.
Adviser levies
Advisers will also be looking for changes in the way they are asked to pay for regulation and for compensation to customers who have been mis-sold.
Funding for the Financial Services Compensation Scheme is under review and we may see the introduction of a product levy or no claims bonus system for those firms whose advisory record is exemplary yet still suffer the fallout from those who are not.
2016 will be a seminal year for pensions, and it is right that the system should be reviewed to ensure it provides encouragement and support to the right people.
That said, if I could ask for one thing in 2016 it would be a period of stability. Once the changes are announced in March please, please let there be some time for automatic enrolment and the new tax relief system tofully bedded in, before there are more changes.
Fiona Tait is pension specialist at Royal London
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