2002 looks like being another year for significant industry revision, with both the Inland Revenue and Department for Work and Pensions ready to dip their oar into the murky waters of pensions provision
If you thought 2001 was a busy year for pension revision, 2002 promises to put it in the shade. Expect specific developments in pension credit, the start of state second pension (S2P), the outcomes of pension simplification reviews from both the Inland Revenue and the Department for Work and Pensions (DWP), and the unveiling of the basis for statutory illustrations of money purchase.
There may also be developments in the compulsion debate, the requirement to buy annuities and pension provision for partners without marriage certificates.
With pension credit, the Government is committed to taking a bill through Parliament this session with implementation during 2003.
The pension credit has two objectives. For people already retired, it aims to put means-tested savers into a better position than an otherwise identical person who did not save. For people not yet retired, it aims to convey a clear message that it pays to save. It is the latter group about whom advisers may be most concerned, since this is the group that can save for retirement.
Unfortunately, the details of pension credit, which have now been announced, do not give a clear message to moderate earners that it pays to save for retirement in all circumstances.
If someone expects to be in the means-testing net when they retire, it means they will receive an income of less than £135 per week for a single pensioner or £200 per week for a pensioner couple in today's money. In other words, they are still being given credit only for 60p for each pound of their funded income and thus the means test is taxing them on this income at the rate of 40p in the pound, treating them like higher rate taxpayers even though they may well not be taxpayers at all.
Yet if moderate earners do not save for retirement, they are almost guaranteed to have an unenviable standard of living for the remainder of their life. With the aging population, the state cannot afford to be generous to future pensioners.
So moderate earners are on the horns of a dilemma, unless of course the employer makes a significant pension contribution for them. A decent employer contribution can remove any doubt that saving for retirement is a good deal for a moderate earner.
S2P starts in April 2002, replacing, for future accrual, the state earnings-related pension scheme (Serps). Nobody will have a lower accrual under S2P than they had under Serps, but the less you earn the more you will gain under S2P when compared to Serps.
Someone earning about £10,000 per year will get S2P accrual, double what they would have got under Serps, and someone earning less than about £10,000 will be deemed to earn that amount for S2P accrual purposes. This represents a massive increase in accrual for someone earning £5,000 a year, for example.
s2p vs serps
If someone earns less than the lower earnings limit (currently £72 a week) they get no accrual under Serps and will get accrual under S2P only if they fall within certain definitions of a carer of young children or aged relatives. A carer who does qualify will be deemed to earn about £10,000 per year for S2P accrual purposes, however.
If that sounds complicated, it is child's play compared to contracting out of S2P. If the contracting out vehicle is personal pension or personal pension stakeholder, contracting out means giving up the whole of your S2P accrual in exchange for an ungenerous rebate. If your contracting out vehicle is any kind of occupational pension scheme ' defined benefit, contracted out money purchase scheme (Comps), or occupational stakeholder ' you will only be contracting out of that part of S2P formerly known as Serps.
If your vehicle is defined benefit, your rebate will be equally ungenerous as personal pensions and personal stakeholder, but if your vehicle is Comps or occupational stakeholder your rebate will be less generous again. This is a prime candidate for the DWP pension simplification review.
The DWP simplification review is chaired by Alan Pickering, a distinguished former chairman of the National Association of Pension Funds. It is looking at the areas of primary and secondary legislation, as well as issues surrounding regulation. It is encouraged to be radical and is to report by July 2002. It is also plugged in to the other pension simplification review, namely the one being carried out by the Inland Revenue.
In contrast to the Pickering review, the Inland Revenue review has been operating under a news blackout. This is understandable given that options being considered by the Inland Revenue review must be tax sensitive by definition. However, there is one particular issue that the Inland Revenue review is known to be considering. This is whether additional voluntary contributions, whether in-house or freestanding, should have tax-free cash of 25% of the fund in the same way that stakeholder and personal pensions do.
The point is relevant to occupational pension scheme members earning less than £30,000, who can now pay additional contributions into a stakeholder or personal pension. It would be a shame if their vehicle for additional contributions were to be chosen purely on the basis of tax-free cash when other factors might be of greater financial significance.
My hunch is that both the Pickering and Inland Revenue reviews may turn out to be of much greater practical significance than the fiddling round the edges that some commentators expect. 2002 could turn out be a watershed in the history of United Kingdom pension provision.
Statutory illustration of money purchase (Simp) pensions has been evolving for some time. From April 2003, the annual benefit statements for money purchase pensions will have to include a projection of what the current pot might buy at retirement. This projection will have to be on a standardised basis, due to be published early in 2002. Pension providers will be free to use this new basis without waiting until April 2003. The Simp basis will be in real terms and expressed in today's money, so it will look very different to, and much lower than, most current projections issued at point of sale. It will be a wake-up call for people who think they have sorted their pension because they are paying in a small percentage of their earnings.
Other developments for 2002 are more speculative. The Government may respond to growing concerns that stakeholder is missing its prime target, namely people earning £10,000-£20,000 per year who do not have a private pension. Such a response might propose increased compulsion but it might instead propose a 'carrots and sticks' approach. The communication and simplification reforms already in the pipeline will also help.
The requirement to buy an annuity has been a running sore for years. The Inland Revenue may continue to approve as annuities more and more flexible contracts, but a more radical approach could come through a change in Government policy. This could be voluntary or it could be forced on the Government if it were to lose the Joe Singer case. Joe Singer is a 75-year-old who does not want to buy an annuity and is wealthy enough to afford the services of Cherie Booth QC.
The Inland Revenue annuity consultation paper may give us some strong pointers to this long-term future for annuities and the need to buy them.
Another speculative area is that of survivors' pensions, where there is no marriage certificate, regardless of whether it was a same sex relationship.
Public sector schemes lag behind private sector schemes in catching up with social change in this area. Perhaps 2002 will be the year that the Government demonstrates leadership on this subject for all public sector schemes.
One of the least predictable aspects of the pensions outlook for 2002 is the performance of the investment markets. For people close to retirement, the key issue will be the terms on which they can disinvest, but for people a long way from retirement, the crux is the terms on which they can invest contributions.
Perhaps the conclusion is that people close to retirement should have a default strategy that minimises risk, essentially moving towards long gilts, but that others should welcome lower equity markets as investment opportunities.
This year may see developments in the compulsion debate, the requirement to buy annuities and pension provision for partners without marriage certificates.
With the aging population, the State cannot afford to be generous to future pensioners.
2002 could turn out to be a watershed in the history of UK pensions provision
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