BY REBECCA TOMES
After a relatively quiet couple of years for pensions, 2021 saw a number of consultation papers, proposals, and studies which could suggest that there are further periods of change ahead. It seems that the period of relative calm for pensions may be coming to an end, and 2022 could see the cogs starting to turn on the next major regulatory and legislative changes.
Here are three themes Jessica List, Pension Technical Manager at Curtis Banks, thinks could be key for 2022.
One of the side effects of the pandemic is that many people are giving more thought to how to make the most of their money, and about how to put it to the best possible use. This is helping shape people’s actions with their money today (for example, with the increased focus on ESG considerations in investing), but also means many more people are considering how their money will (or could) be used in the future as well.
Intergenerational planning is becoming a huge area in financial services. Broadly speaking, there are two areas to consider: passing on wealth during a person’s lifetime, and passing on wealth after death. Given the different rules and considerations that would apply to different types of assets in each case, it’s easy to see why it’s such a significant area.
The last couple of years have seen a lot of discussion about the need to reform the inheritance tax rules, as well as papers about the wider issue of intergenerational inequality, such as The Intergenerational Foundation’s ‘Left behind: a decade of intergenerational unfairness’. All have come with suggestions about ways to reform and simplify the tax system and create an environment which encourages people to act in a way that reduces intergenerational inequality.
As pensions are often one of a person’s largest assets and most are normally exempt from inheritance tax, they will undoubtedly form an important part of any discussions in this area. There’s a lot of flexibility in defined contribution death benefits – particularly in products like SIPPs, which are more likely to allow the full flexibility allowed by the rules. Such products are potentially very beneficial for intergenerational planning. However, this also means that if the wider inheritance taxation system was reformed to encourage certain behaviours, defined contribution pensions could end up offering something of a loophole to those who would prefer to act differently. Therefore pension death benefits rules would need to be considered to make sure they fit into any wider system reforms.
Normal minimum pension age (NMPA)
The 2028 NMPA increase made headlines throughout 2021, and this is set to continue in 2022. Last year brought unexpected and complex proposals for a new form of protected pension age (PPA) related to the increase, as well as some further surprise changes to those proposals. It may be too soon to completely rule out any further changes, particularly given how unhappy the industry is with the suggestions and their potential to add complexity to the pensions system for many years to come.
If the latest rules announced on 4 November 2021 go into legislation in 2022 as they stand, they will apply retrospectively from that date. This would mean many providers will need to go back to check transfers that took place from that date, to see if they are affected and if any corrective action is required. As the rules announced on 4 November took immediate effect (or rather, will have taken immediate effect, if they are implemented with no further amendments), there was no time for providers to prepare systems and processes to cater for them – either in terms of recording the appropriate information, or administering transferred funds in line with the new requirements.
In many cases the transfers won’t be affected and no further action will be required. However, advisers with clients who began a pension transfer from 4 November 2021 onwards can still expect to see correspondence this year as providers seek to gather further information – again, assuming there are no further surprise changes to come.
Unfortunately, it seems unlikely that we’ve seen the last of the seemingly endless debate around contribution tax relief. Tax relief reform has been predicted at every Budget for years, and we’ve all seen countless calculations about the potential effects of various possible reforms on different groups of savers.
However, it’s hard not to wonder how long pensions can escape with no major tax changes after the pandemic, and changing contribution tax relief would seem to be an area where significant savings could potentially be made. It also wouldn’t be a completely unexpected change, given that people have been speculating about it for years.
Of course, one of the reasons tax relief reform has been so widely discussed is the difficulty agreeing what the reforms would look like and how they would be implemented. If everyone can agree that the new system should encourage people to save for retirement, there’s little agreement about what would, in practice, encourage people to save. Similarly, there’s agreement that the new system should be fair, but very little consensus about what ‘fair’ looks like. Implementing any of the types of reforms that have been proposed so far is an even more difficult subject.
Despite this potential complexity, I wouldn’t be entirely surprised if any tax relief reform also came hand-in-hand with other changes – for example, to the annual and lifetime allowances, which have themselves become horribly complex over the last few years. If the pension freedoms revolutionised how people access their pension savings at retirement, perhaps next we will see a raft of reforms aimed at transforming the way people save to begin with.
This is just an introduction to three pension topics to watch out for in 2022 – we believe there will be many more in depth discussions about all of them throughout the year, as further information becomes available and the implications for customers, advisers, and providers become clearer.