In her speech to parliament she confirmed that the Government reforms to the way in which pensions are accessed will allow for “innovation in the private pensions market” to give discretion to those who have saved for their retirement.
She added that the reforms will give greater control to employees, extend ISA and premium bond schemes and abolish the savers’ 10 pence tax rate.
In March’s budget, chancellor George Osborne said the UK Government would remove the current requirement for retirees to purchase an income stream, whether through an annuity or through phased drawdown.
This means that someone reaching the age of 55 will be able to take their entire pension out at once, with 25% tax free and the rest taxed at the retiree’s marginal rate.
Additionally, Osborne announced that the 55% UK death tax, which is often cited as a key reason to use a QROPS, is to be reduced and possibly even scrapped altogether.
Prelude
Director at Global QROPS, Paul Davies, said today’s announcement was a prelude to the “Freedom and Choice in Pension” consultation, currently in progress.
He said the consultation, which allows industry professionals to give their views on the government's pension proposals and will be released on 11 June, will have more impact on the pension market.
“Some of the changes to pensions have already come into effect and some will come in after the consultation, which may take longer to be widely implemented,” he said.
“The speech is largely a formality, the Queen represents the people and is unlikely to disagree with what the parties they have elected in say, but it is still interesting to see the changes going ahead.
“The changes made in the Budget and the effects they will have will become a lot clearer after the consultation.
“There are some major changes in legislation but just how crucial they are is not yet clear."
'Only one will pay you back in the future'
Head of EMEA retail at BlackRock, Alex Hoctor, said his company welcomed the changes but displayed caution towards the so-called “defined ambition” pension schemes currently being considered by the UK Government.
Defined ambition pensions hope to share financial risks between the employee and employer fairly by combining the existing defined benefit and defined contribution schemes.
For example, under the proposed schemes, an employee could be promised a minimum pension pot size at a selected retirement age. This means that while an employee would not know the exact size of their pension upon release, as in a defined benefit scheme, it would not be completely hidden from them as in a defined contribution scheme.
“While defined ambition collective pension schemes promise to smooth returns and reduce costs, fair risk sharing across members is dependent on the accuracy of subjective market and demographic forecasts,” Hoctor said.
“They also require a very large and stable membership across generations in order to be effective.
“This may also create the unintended consequence of introducing more complexity and actually reducing choice in our pensions system.”
He added that the legislation will only protect the public to a certain degree, stressing that only 47% of the public are currently saving for their retirement.
“This reiterates that education on the importance of saving regularly and as early as possible remains a crucial element to developing a savings culture, and in ensuring the future of an effective retirement system in the UK.
“Ultimately, putting money aside for your pension should be just like paying any bill on a monthly basis, the difference is this one will pay you back in the future.”
