Set against this, pensions had become a rather tired product with questions on whether it was still fit for purpose. However, few would have predicted the radical changes being introduced by the pensions minister Steve Webb. Coupled with the success of auto-enrolment, these are breathing new life into pensions.
The changes will introduce much needed flexibility into the way people can access their pension. Options to take the whole as a lump sum, to access tax-free cash and to pass on the pension tax free is giving people greater choice over how they access a defined contribution pension. From April this year, those aged 55 or over will see withdrawals treated as income and tax will depend on the amount of other income in the year. Contrast this with the 55 per cent tax for full withdrawal previously imposed. The rules are also being extended to an estimated 18 million people who will be able to transfer from a defined benefit scheme to a defined contribution one if they wish to access their pension flexibility.
One of the biggest boosts from the changes will be the ability for people to pass their pension to others without paying tax. In future, those who die under 75 with a defined contribution pension will be able to pass on their unused pension as a lump sum to a person of their choice, tax-free.
In a further announcement in the 2014 Autumn Statement, the chancellor also signalled that payments from certain types of annuities will be tax-free when paid to a beneficiary if the policyholder dies below the age of 75. Even those who die after the age of 75 with unspent defined contribution pensions will be able to pass this to a person of their choice who will be able to take it as a lump sum taxed at 45 per cent or as income and pay their normal rate of income tax.
These changes are extremely welcome and should act as a real boost to encourage people to save for their retirement, confident that they will have control over their hard-won savings. The growing popularity of self-invested personal pensions which offer much wider investment powers covering a broad range of assets is a good example of how people are becoming more engaged with their pension saving.
Changes to the state pension to introduce a flat-rate pension will also help to remove unwanted complexity and allow people to make realistic plans on how to fund their retirement.
All this is good news for the industry. An increase in the prominence of corporate platforms is anticipated following the new retirement freedoms and increase to Isa subscription limits. Integrating a SAYE scheme with the workplace Isa will allow employees to transfer shares into the Isa and also mitigate capital gains tax liability. The evolving maturing SAYE scheme market will also prove attractive to asset-gathering platforms. In addition, there are clear advantages linking a share incentive plan (SIP) with a workplace Sipp allowing employees to benefit from double tax relief. This new flexibility in product alignment is expected to spark further platform innovation to accommodate developing consumer demand.
