Pension allowance changes and a state pension rise make advice more important than ever, writes Emily Perryman – and now is the time to prove it.
The start of a new tax year is a good time to review clients’ pension contributions and ensure they are complying with legislative changes.
In April, there are some important measures being introduced which could affect how clients save for their retirement and access their pension pot.
A key change coming into effect next month is the reform to the money purchase annual allowance (MPAA). This is the amount that people can contribute to defined contribution pensions each year once they have already started to take their pension benefits.
In April, the MPAA will fall from £10,000 to £4,000. The aim of the change is to prevent people from “recycling” their pension savings in order to take advantage of tax relief. There is a risk it could catch out people who have already started to draw money from their pension pot, but continue to work and save into it.
Philip Brown, head of policy at LV=, said: “While this reform may impact only a small number of retirees, and possibly only higher earners, advisers should familiarise themselves with these new rules so they can warn any clients who are currently drawing their pension but want to continue to save.
“It is also crucial that this is explained to clients approaching retirement so they take this into consideration in their pension planning.”
The change means that clients must be a lot more certain they are ready for retirement before accessing their pension.
Steven Cameron, pension director at Aegon, said if there is a chance a client and their employer are paying in more than the cap, they should think carefully before exercising their pension freedoms.
He explained: “Accessing pension funds early – for example, to generate a one-off cash sum while still working to pay off a debt – could now seriously affect future pension prospects. It could even stop people receiving the full amount their employer is prepared to contribute if this would take them above £4,000.
“This is a further reason to seek advice before accessing pension freedom.”
State pension increase
The annual increase in benefits, including the state pension, will take place in the first full week of the tax year (i.e. the week beginning 10 April).
The basic and new state pension will be increased by the government’s triple lock manifesto commitment, rising by 2.5%. This is in line with earnings growth and the minimum payment promised to pensioners through the triple lock.
From April, pensioners on the new flat rate pension will see their weekly payments increase from £155.65 to £159.55. This means they will be more than £200 better off a year, with total annual income increasing from £8,093.80 to £8,296.60.
Those receiving the old, basic state pension will see their payments rise to £122.30 from £119.30, leaving them £156 better off over the year.
Although the increase is good news for pensioners, Brown said the amount is unlikely to be enough for the majority of retirees to live on.
“Advisers should factor the new higher amount into their retirement planning for clients, but they should also be clear with clients about the limitation of this amount and the need for a suitable blend of products that can deliver a sustainable income.
“The government has also guaranteed the triple lock only until 2020 and is under ongoing pressure to scrap this commitment, so clients must realise the state pension could still go down, as well as up, in the long term.”
Annual allowance taper
The annual allowance taper for people earning more than £210,000 came into effect in April 2016, but tackling it is an ongoing challenge.
The taper affects individuals with adjusted income (taxed earnings, plus all pension contributions, minus certain allowances) of more than £150,000 and gradually reduces the amount which can be paid into a pension from £40,000 to £10,000 a year.
For those with adjusted incomes above £210,000, the limit is fixed at £10,000 per year. According to Cameron, this makes pensions less attractive to this group with the possible result that high-earning bosses will be less likely to go beyond their legal duties for employee pensions.
“For those ‘in-between’, it can be very complex to make sure they are not exceeding the limit and advisers should be identifying their clients who may need help in this area.”
Simon Ruthers, director of business development at Oxford Capital, said the difficulty with the taper is clients will not know if it affects them until the end of the tax year. Problems could arise if someone gets an end-of-year bonus, which could cause their income to exceed the threshold and trigger the taper.
“If someone’s income is consistently above £210,000, they will know they have a £10,000 allowance, which will make pensions a small part of their retirement planning,” Ruthers said.
Given the ongoing changes in the pensions industry and the complexities of the taper, the role of advice could be even more essential over the coming year.
“Brexit and other worldwide, as well as domestic, political developments create new risks and uncertainty for people and will no doubt form the basis of many adviser conversations with their clients,” said Cameron.
“We are particularly keen to see the Treasury and the Financial Conduct Authority advance the recommendations that emerged from the Financial Advice Market Review last year. We have a real opportunity to make advice in its various forms more readily available to a wider range of people.”