ABI reveals pension changes set for 2016

The stakes for the country couldn’t be higher. Again, the 2014 Budget experiment looms in the background.

With the annuity deal undone, pension pots can, at least in theory, be used to buy supercars, so there is arguably little need to incentivise pension savings with generous tax breaks.

The attraction of a ‘pension-Isa’ is self-evident – theoretically bringing forward billions in tax receipts, and making more of a seemingly well-understood and popular ‘brand’.

But the long-term consequences for the country would be devastating. Just at the point where we know from the OBR’s forecasts that the proportion of GDP spent on our ageing population will increase by 40 per cent over the next 50 years, we would take the pensioner population out of tax altogether.

We would saddle our children with an ever greater financial burden, potentially denting GDP by between 1.4 per cent and 9 per cent in the transition process (even assuming an upfront government matching contribution of between 20 per cent and 50 per cent), according to the National Institute of Economic and Social Research.

Instead, the ABI is advocating a “saver’s bonus”. Set at a single rate regardless of people’s marginal rate of income tax, it would be simple and intuitive; motivate people to take personal responsibility and save by using loss aversion; lead to a more equal distribution of tax relief between basic and higher rate taxpayers; and keep employers on side.

Importantly, it can also be structured such that it saves government money. Last but not least, whilst not trivial, the industry could implement such a change more quickly than a wholesale switch to an Isa-regime.

But 16 March 2016 won’t be the only major pension event next year.

2016 will also see significant work to set up the structures, regulation and consumer protection for a secondary annuity market.

Again, the 2014 Budget set the wheels in motion for the idea that people should be able to assign their annuity income stream to a third party in return for a lump sum.

While a logical consequence of the pension freedoms, the risks are considerable.

In particular, we will have to work extremely hard at ensuring people fully understand what they are getting into. Consider for a moment someone with an enhanced annuity.

When taking out an annuity, a smoking habit leads to higher pay-outs, but the reverse is true if that annuity is then sold on for a lump sum – this will not be intuitive for most people.

It is clear that the regulatory and consumer protection environment will need to be thought through extremely carefully to support people as they consider whether to take this step.

Add to this the first reports of the Independent Governance Committees, out in April, preparing for the auto-enrolment review, and the European pension agenda, and it looks like 2016 will be another full on year for everybody involved in long-term savings.

Dr Yvonne Braun is director, long term savings policy at the Association of British Insurers