Pensions update

Pension law in the UK is not so much a stable and constant system, as an ever-changing arrangement that is constantly affected by social, economic and political pressures. UK pension schemes were born in the beginning of the 20th century, when elderly people who made less than £31.50 a year were entitled to an additional five shillings a week. UK pensions reached their infancy only after the second world war, when the government retracted the poor laws and began wider national programmes to combat poverty.

A lot has changed in the past century, and the past ten years in particular have seen great shifts in UK pension law. In 2002, the Pensions Commission was established to regulate pensions and long-term savings. In a rapid fire burst of legislation, Pension Acts exploded onto the scene in 2004, 2007 and 2008, as the commission sought further reforms and regulations.

The latest change in pension law entered the playing field only last month. George Osborne delivered a tremendous speech to parliament, outlining the 2014 Budget. In the days before, news sources drove themselves mad trying to predict the ultimate effects of the Budget. Pension reform was a hot topic, and The Telegraph declared that there
was a 90 per cent chance that pension pots would be revised.

Forecasters were certainly not disappointed; the new budget has had a sweeping effect on the field of pensions. Some of the reforms were expected, but the scale of the reforms has come as a shock. In fact, the Financial Times has lauded the new budget as “the most significant changes to the pension market since 1921”.

The chancellor himself stated that the planned changes were aimed at pension schemes and that the Budget itself had been drafted to support individuals that have worked hard and saved hard all their lives, and done the right thing. He said: “This is a budget that supports pensioners, savers, workers and makers.”

The recent economic downturn, the chancellor believes, was particularly tough on savings accounts, which were consistently restrained by
low interest rates. The government expects that
the economy is in an upswing now, and has even amended its previous growth estimate of
2.4 per cent increase to a 2.7 per cent increase in annual economic growth.

With this new growth in mind, this budget is designed as a means of giving back, of supporting those whose savings suffered from measures meant to save the economy.

Non-UK schemes

Changes to the pension scheme were smaller, although no less significant. Legislation on qualifying non-UK pension schemes is in the works, for parliament to best ensure equality across the board. The age rule that prevents individuals over 75 from claiming tax relief on pension contributions is being re-examined.

Dependant’s scheme pensions are also being revised and the government is working to simplicity and fairness in their respect.

Larger scheme-altering legislation is also in
the works. The most radical of all the newly imposed changes are the measures relating to annuity. Under the new budget, members of defined contribution pension schemes can
access their pension fund in full without having to buy an annuity. The purpose here is to make it much simpler for people to withdraw money directly from these pots. They will be taxed at the marginal tax rate, rather than the 55 per cent rate
currently applied.

Transitional measures to allow immediate flexibility, primarily by increasing the maximum annual capped drawdown pension limit to
150 per cent and increasing commutation limits, will take effect from 27 March 2014. A wider consultation on the changes was also launched, including proposals to raise the normal minimum pension age to 57 in 2028. The chancellor has come under criticism for this move, with Labour officials questioning whether or not the scheme will encourage people to squander their savings.

Osborne holds strong, however, insisting that pension holders are more responsible than the law gives them credit for, and that savers who have consistently put money into their pension throughout their lives are unlikely to make poor financial decisions when it comes to accessing
that money.

Small pot limits have also been substantially increased. This number will jump from a mere £2,000 to a full £10,000. Defined contribution (DC) members will also be allowed three small pension pots, where they have previously been allowed only two.

Saving bond

The Budget also introduced a new pensioner
saving bond scheme run by National Savings & Investment. This new plan will come into play in next January and offers greater interest rates to savers over the age of 65. The full details of the scheme are not yet fleshed out, and we have to
wait until August for the exact rates. But the chancellor has suggested interest rates of
2.8 per cent for a one-year bond and up to
4 per cent for a three-year bond.

A new guidance guarantee will be introduced
so that all individuals with a DC pension approaching retirement will be offered advice to assist their decision-making. A new duty on pension providers and schemes to deliver this guarantee will be introduced by April 2015. The government will provide funding of £20m for the project to take off but it is not clear whether the government will continue to fund the project following its initial contribution. It is expected that The Financial Conduct Authority will police the project to ensure that the relevant standards are being met.

These bonds will have a limit of £10,000 each and can be taxed like any other saving. Premium bonds will also be available for purchase up to £40,000. Danny Alexander, chief secretary to the treasury, was quoted as saying that this scheme was intended to aid those whose savings were “eroded by the low interest rates that have been an absolutely necessary part of this government’s economic plan”.

Furthermore, the bonds are intended to help individuals keep up their saving habits well into their retirement.

Liberation schemes

Wider powers for HMRC to combat pension liberation schemes include introducing the requirement, from 1 September 2014, that any scheme administrator must be a “fit and proper person”, and that HMRC may deregister a scheme where it appears that the main purpose is not to provide authorised benefits. SJ

Dilini Loku is a solicitor at Silverman Sherliker