In the latest edition of the SMTA magazine Auto Insight, Chartered Financial Planner Richard Libberton discusses pension reforms and how these could affect your pension funds, opportunities for those who can save more and why some people may now be reviewing their retirement strategies.
Pension reforms – What you need to know.
The UK Government set out plans for a radical change in pension savings at the start of the summer.
The changes aim to address three main areas of concern –
1 to boost the UK’s retirement savings and therefore improve the outcomes of many retirees
2 to improve outcomes for investors in pensions
3 to help fund UK growth companies
The reforms set out the framework for achieving those outcomes.
Three large pension companies in the UK (Aviva, Nest and Aegon) will commit to allocating 5% of their default funds to unlisted equities by 2030. It is hoped that this action will encourage other large pension companies to follow suit. This should in theory give a boost to smaller UK companies who are often starved of capital, as pension companies prefer listed equities which are often outside of the UK when seeking the best returns for their pension holders.
The reforms also talk of consolidation in the defined contribution pensions area which will allow for a more diverse split of assets for pension holders, with the poorer performing funds being potentially wound up by the Pensions Regulator.
It is not just private pensions which the reforms would impact. Local Government schemes are included too and these changes are open to consultation.
The risk of unlisted companies
Broadly, the proposed reforms have been welcomed as any investment to help UK pension holders enjoy a better retirement is a laudable principle, even more so if these changes will help boost the UK economy and help address the UK’s productivity challenges. However, investing in unlisted equities does provide an element of additional risk. This sector of the market is already covered by specialist managers, which could leave the large pension companies as forced buyers of the remaining companies which could result in losses if the company fails, as many unlisted companies do.
It is certainly an area to watch for further developments. Pension investors should keep an eye on the default funds that their pension is invested in, if in the future, they do not wish to take on this additional risk.
Big benefits for those who can afford to save more
Reforms to pensions legislation are also aimed at helping savers build for a better retirement. At present there are limits on how much individuals may save into pensions over their lifetime, as well as how much may be saved in each tax year. These are referred to as the lifetime allowance and the annual allowance respectively. The lifetime allowance of just over £1 million was scrapped on the 6th of April 2023 and will be abolished completely from the 6th of April 2024, meaning that there is no limit on how much may be saved into pensions. The annual allowance was increased from £40,000 to £60,000 from 6th of April 2023, giving a significant boost to those who have the capacity to save such large sums in any tax year.
Those who have started to withdraw income from their pensions will now have the ability to contribute up to £10,000 per annum back into pensions under the money purchase annual allowance. This allowance was increased in April 2023 from £4,000.
There is further benefit for very high earners, who depending on their income structure, could previously only contribute £4,000 per annum through a tapered annual allowance in a tax year. They are now able to contribute £10,000 per annum. The amount that they are able to earn before this limit kicks in has been increased to £260,000.
Encouraging retirees back into employment
These changes are a welcome set of reforms for pension savers but will benefit those with the ability to save more, such as NHS doctors and dentists, for whom the previous regime was deemed to be a reason for them leaving their professions early. Furthermore, for those who retired more recently, the increase in the money purchase annual allowance to £10,000 could tempt them back into employment, allowing them to join and contribute to pension schemes while still drawing income from the private pensions.
These reforms will result in many people reviewing their retirement strategy. A secure and enjoyable future should not be left to chance so planning ahead as early as possible is recommended. And remember, if you are looking for a financial adviser to support your planning, ensure they are suitably qualified and regulated.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available.
Richard Libberton is a Chartered Financial Planner with Thomson Cooper Accountants. He has held a number of senior positions within some of the UK’s largest mutual life, pensions and investments companies during his career. He is responsible for managing the financial planning and investment requirements of clients.
Richard is a Fellow and past Chair of the Personal Finance Society Central Scotland Region, and an advocate for diversity and improving standards in advice.
Richard has also contributed to thought leadership initiatives, joining BBC Radio Scotland to chat about the value of Life Assurance, Income Protection & Critical Illness Cover, as part of their Clever About Cash series.