New figures from HMRC have demonstrated 360,000 people have withdrawn from their defined contributions in the last quarter of 2020, which is 10% up on the previous year, amounting to £2.4 billion. This compares to £2.2 billion during the same period in 2019 and a 4% rise in the preceding three months. Somewhat unsurprisingly this is an abnormal seasonal pattern and counter trend as there is usually a drop during these times on (defined contribution – DC) pension withdrawals, attributable no doubt to the impact of the Covid-19 pandemic.
An individual’s freedom to make tax-free contributions to a registered scheme is subject to an annual allowance of £40,000 which is then taxable beyond that threshold. However, where an individual first flexibly accesses their money purchase pension savings, they are subject to a modified annual allowance assessment in respect of their money purchase pension savings known as the Money Purchase Annual Allowance(MPAA).
The result is, all subsequent savings to a money purchase pension scheme will be subject to the MPAA limit, which has been reduced from £10,000 to £4,000 a year, though the treasury has been urged to reinstate the £10,000 as savers are being unfairly penalised for accessing their own money.
Global stock markets will continue to have sporadic volatility for some time yet, serving as a reminder that long term investing is better. As most people have a DC pension, this is causally related to how the investments perform, with the individual taking the risk. As some investments have fallen in value, it should be a time for vigilant observation and concern.
Yet individuals, families, responsibilities, all call for financial consistency and buffering. Therefore those with access to pension pots and savings have been bailing out family members purely through desperate need, with one in four parents financially supporting their offspring since the pandemic started in March 2020.
The pensions minister announced last week that pension transfer rules are set to get tougher. Now financial advisers are struggling to advise people who are currently in occupational pension schemes – final salary schemes or defined benefit pension schemes – to transfer to defined contribution, or what is more of a standard pension. Sometimes the rules would benefit a client to do this but the Financial Conduct Authority (FCA) are deliberately blocking the Treasury’s initiatives around pension freedoms when it comes to these pensions. Advisers fear the implications of complaints procedures and Professional Indemnity insurance costs are now so high for adviser practices to take out to cover themselves in case there is a complaint by a client or through the FCA, that most adviser firms are now not offering the facility to advise clients on these types of transfers.
What were once considered the ‘safe’ and easily quantifiable occupational pension schemes such as the final salary and the defined benefit pension scheme have in recent times been subject to employers making reckless decisions leaving schemes to run into the ground, as has been reported in the Media. However these are now strengthened by the Pension Schemes Bill, with more power given to The Pensions Regulator (TPR).
The increased TPR measures would strengthen the existing criminal and civil sanctions by introducing three new criminal offences and a new power to issue civil penalties of up to £1m and the ability to recover any losses inflicted on a DB pension scheme as a consequence of avoidance behaviours. Corporate transaction oversight has been enhanced by requiring persons involved in a corporate transaction to make a statement putting out information about the event and how anything potentially detrimental to the DB scheme will be mitigated.
The Pension schemes Bill was granted Royal Asset in parliament on the 13th of February 2021, as part of the ‘tougher transfer rules’ with trustees given the power to restrict statutory rights to transfer if scam activity is suspected.
The Pensions Minister Guy Opperman referred to regulations that are “very advanced “saying they will be with journalists soon and in books by September or October. Along with Defined Benefit (DB) and Defined Contribution (DC) Schemes, there will be the possible inception of a third option called the Collective Money Purchase Scheme (CMPS) where risks would be shared entirely by the members, and benefits collectively.
The Bill would then create a pensions dashboard, these being digital interfaces enabling people to see all their pensions in one place for better overall judgement decisions and appraisals. The options are a single dashboard provided by the Money and Pensions Service (MaPS) where the Work and Pensions committee recommend this for its “simple, impartial and trustworthy” information repository. Alternatively the Government recommends multiple dashboards, including a non-commercial dashboard as an impartial service for further consumer options, although the criticism is that this would add complexity and draw ‘self-interested providers’.
The territory is changing, inexorably, compelled by substantial changes in the world economy, trying to recover from a global pandemic and of course following Brexit, the UK’s diligence in seeking out the wisest choices and preparations for a future still steeped in uncertainty.
Financial advisors, and their services, still provide the personal oversight needed to gain the personal engagement with the individuals, and their families and loved ones, to help in negotiating a constantly challenging and changing terrain.