The UK’s long-term savings and investment industry is undergoing significant upheaval as the Government moves to make major changes. George Osborne’s radical Budget is set to offer greater freedom to pension savers. Whilst a drive by the Department for Work & Pensions (DWP) and Financial Conduct Authority (FCA) is set to boost transparency and ensure good practice. Let’s look at the main changes and the potential impacts.
Long-term low interest rates has meant discontent with annuities had been building for some time, although the dramatic reforms announced certainly shocked the industry. From April 2015, individuals will no longer have to purchase an annuity and will be given more freedom over how they manage their pension pots. Those over 55 will be able to take their entire pot as cash. The 25 per cent tax free sum will remain, with further withdrawals taxed at the individual’s marginal rate. To support the increased flexibility, the Government has pledged free face-to-face guidance for all consumers retiring with a DC pension. The ability to purchase an annuity remains and it will be interesting to see the level of demand, with early indicators showing a significant drop in sales volumes.
This increased flexibility is likely to be positive news for platforms. There is a high chance that assets will be retained during the decumulation phase with more individuals remaining invested and entering into drawdown. With the potential rise of D2C in the at-retirement and decumulation space, platform propositions capable of delivering a joined-up and engaging customer experience will be best placed to prosper.
Platforms also have greater scope to tap into savers who had yet to invest in the stock market thanks to the repackaged ISA. A new limit of £15,000 will apply from 1 July 2014 and can be used for stocks and shares, cash or any combination with two way transfers also allowed.
Following the Budget, Pensions Minister Steve Webb announced a cap of 0.75 per cent on charges for workplace auto-enrolment schemes to apply from April 2015. The cap only applies to default funds used for auto-enrolled employees, but with the vast majority remaining in the default fund, the implications are widespread. The initiative will be reviewed again in 2017 with a view to reducing the cap even further. Webb also confirmed the end of active member discounts. With approximately 10,000 schemes having these in place, members who move employer are at a significant disadvantage. Pension savers will benefit from full disclosure of all charges, whilst scheme providers will focus on reducing their administration costs. This emphasis on reducing costs provides an opportunity to embrace advanced technology which can help to streamline operations and improve efficiency.
On top of all this, the FCA confirmed plans to review a ‘representative sample’ of historic life insurance, pension and endowment policies, in order to monitor whether long-standing customers are being treated fairly. The FCA has said that it will not apply current standards retrospectively or remove exit fees which tend to be a feature of pre-2001/stakeholder products. The review will span 30 firms and is expected to commence in the summer.
With plenty of challenges ahead, it will be interesting to see how the industry looks this time next year. Some commentators are suggesting that the budget could be the UK’s 401k moment. The increased flexibility on offer should help to drive engagement in retirement planning as the 401k plan has in the US. As seen in the findings recently released by the TISA Savings and Investments Policy Project (TISP), individuals need to take responsibility for their future financial wellbeing, before it’s too late.