Steven Cameron, Pensions Director at Aegon, comments on:
• Rising inflation
• Consumer investment strategy
• National Insurance increase
• Impact of LTA freeze
• Stronger nudges to pension guidance
• Defined Contribution Scheme consolidation
• New Consumer Duty
Macro-economic uncertainty – rising inflation and interest rates
“Advisers are well placed to help their clients navigate through both the challenges and opportunities of the ongoing macro-economic instability. Forecasts suggest inflation will average around 4% in 2022*, peaking around 5% in April and despite Omicron uncertainty, the Bank of England is under increasing pressure to lift the base rate from its historic low of 0.1% to ease inflationary pressures.
“Rising inflation poses a particular risk for those who hold large sums of money in cash and can disproportionately affect retirees living off a fixed income. The higher inflation is, the greater the stealth impact on limits such as the Lifetime Annual Allowance or the Money Purchase Annual Allowance. A rise in interest rates poses its own risks, most notably making it more expensive to borrow money, but it can also carry benefits, such as improved returns on cash savings and potentially higher annuity rates. However, interest rate increases are likely to be more than outweighed by higher inflation.”
*OBR: Overview of the October 2021 Economic and fiscal outlook
Consumer investment strategy
“We expect the FCA to consult on aspects of its Consumer Investment Strategy early in 2022. It believes too many individuals are holding too much in cash and is targeting those with over £10k of investable assets in cash, believing those who can accept the risk could be making their money work harder by investing it. This of course will also support the UK’s post-pandemic economy.
“We expect a consultation on a new form of ‘guided sales’ to help support such individuals invest some of that excess cash. This is the first sign of the FCA considering a more personalised form of guidance with less regulatory burden than full financial advice. Advisers might want to start thinking about how they may wish to build a more personalised form of guidance into their client propositions, perhaps to reach new segments or in workplace situations.”
National Insurance set to rise
“From April 2022 National Insurance contributions (NICs) will increase by 1.25% for employees, employers and the self-employed, to provide additional funds to the NHS as well as funding the government’s share of the new social care deal. From April 2023 this 1.25% increase formally becomes the new Heath and Social Care Levy and will be shown on pay slips. The increase will be extended to those over state pensions age, meaning this group will start paying 1.25% NICs for the first time on earned income. Dividend tax rates outside of ISA and we believe pension wrappers will also rise by 1.25%.
“Advisers will need to be prepared to help their clients understand what the increase in NI means for them. It may be that some will see greater attractions to pay pension contributions by salary sacrifice although the rules here are unclear. While this may be of benefit for as long as the extra 1.25% is within the NI system, it may not be possible from April 2023 when it becomes a separate levy.”
Freezing the pensions lifetime allowance begins to bite
“The freezing of the pensions lifetime allowance at £1,073,100 until 2025/26 was one of a range of stealth taxes announced in the Spring 2021 Budget. Since then, inflation has risen dramatically, meaning the impact of all frozen thresholds will be felt by more individuals.
“Advisers have a key role to play in helping individuals assess the risk of potentially exceeding the lifetime allowance, perhaps because of a combination of defined benefit and defined contribution pensions, and then to decide what if any action they should take as a result. This may involve explaining why exceeding the allowance may be better than sacrificing employer pension contributions.”
Rules on stronger nudges to pensions guidance become effective
“From 1 June 2022, pension providers will need to give a stronger nudge to Pensions Wise when customers ask to access their Defined Contribution pension flexibly. The Government wants thousands more people approaching retirement to access valuable Pension Wise guidance as ‘the norm’. But I really don’t see the point of rules requiring the nudge even to those who have taken advice. Ideally, many people opt to pay for full financial advice, which will offer a tailored recommendation based on personal circumstances. While they may well opt out of Pension Wise guidance, nudging them looks like a waste of time for all concerned.”
Scheme consolidation
“From 2022, trustees of smaller single employer occupational DC pension schemes with funds under £100m will need to carry out annual value for money assessments, and on failing, unless they have a sound and prompt recovery plan, will need to wind up and consolidate.
“Scheme consolidation is a complex exercise and not one to undertake lightly or without professional advice. The Government’s ambition of accelerating scheme consolidation further amongst schemes with funds up to £5bn will create shortages of such advice and bottlenecks in consolidator schemes’ ability to take on new schemes. A tsunami of schemes clambering to consolidate would be highly damaging to the DC market and risks widespread member confusion if significant changes to their retirement funds are not well planned and communicated.”
FCA’s New Consumer Duty
“The FCA is pushing ahead with its new consumer duty, which it describes as a ‘reset’ and ‘fundamental shift in industry mindset’. The aim of making sure firms have good customer outcomes at the heart of all they do is admirable, and the latest consultation adds more detail to FCA expectations.
“The final rules are expected by July 2022, with an implementation period running until April 2023. The draft regulations and guidance set out expectations for both manufacturers and distributors, including many areas where working together will be required to understand aspects such as target markets and new value assessments. All firms including adviser firms should get ready to undertake a substantial gap analysis exercise.”
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