The pace of change for pensions never stops. Even in a so-called quiet year like 2018, there have been developments which will have long-lasting implications for the advice profession.
The backdrop of political confusion caused by Brexit has been reflected in the change at the top of those with overarching responsibility for pension policy. We started the year with David Gauke as Work and Pensions Secretary, moved on to Esther McVey, before ending the year with Amber Rudd.
The one constant through all this however has been Guy Opperman, the minister for pensions and financial inclusion.
Away from the politicians, the most stable element of this year when it comes to pensions has been the tax rules. This is despite regular rumours predicting the demise of pension tax relief for higher rate taxpayers.
The only change was the rise in the lifetime allowance to £1.03m in April, and the promise of it nudging up again to £1.055m next tax year. (Though at this rate, it will be another seven years until it reaches the giddy previous heights of £1.25m.)
But even if the tax rules didn’t change, there were plenty of other initiatives from the FCA for advisers and planners to contend with.
The FCA and DB transfers
To start with, this was the year the FCA finally got serious about pension transfers.
Amidst the fallout from the British Steel Pension Scheme debacle, the regulator sought to change its rulebook in relation to pension transfer advice.
Gone is the transfer value analysis, and in its place we have the appropriate pension transfer analysis (Apta) and the transfer value comparator (TVC).
The new rules set the responsibility of the pension transfer specialist. They emphasise that transfer specialists should review where the money is being transferred to and the underlying investment, alongside considering the client’s attitude to transfer risk and investment risk.
The starting point for giving advice remains as resolute as it has ever been - advisers should assume that a transfer would be unsuitable and is unlikely to be in the client’s best interests.
Along the way, the FCA has tackled a couple of thorny issues, such as setting new qualifications for pension transfer specialists and outlining how triage should work. While it stopped short of introducing a ban on contingent charging, the FCA has said it will carry out further analysis in this area.
Alongside the rulebook changes, the FCA also ‘went deep’ through its use of firm visits. Nine firms were banned from giving transfer advice (excluding those involved in British Steel advice).
Then, just as we were beginning to tuck into the mince pies, the FCA released its key findings on its work on pension transfer advice, based on the firm visits and file reviews it carried out.
The headlines aren’t encouraging. Only 48 per cent of the transfers reviewed were deemed suitable, the remainder considered either unsuitable (29 per cent) or unclear (23 per cent). The regulator is clearly concerned about the suitability of advice, and frustrated that firms aren’t taking the appropriate action to correct their processes.
Retirement outcomes review
The FCA has spent the last few years reviewing the retirement income market following the introduction of pension freedoms. Earlier this year the regulator proposed a package of remedies to address potential consumer harm.
Key to the changes coming in next year is a new type of wake-up pack; one that will be initially issued at age 50 and then every five years after that, until the individual’s pension funds are fully crystallised. It will also include a single page summary outlining the important information about their pension pot. We can expect final rules on this soon.
The FCA’s big idea though was the creation of ‘default investment pathways’ for those who enter drawdown without advice.
It proposed three different pathways each aligned to a different retirement objective, to make sure people choose an appropriate investment path rather than sticking all their drawdown fund in cash. We can expect more detailed proposals in the new year.
All of this is positive – clearly, setting the right investment is an important part of setting a drawdown strategy. But so is choosing an appropriate withdrawal rate, and the consultation was quiet on this aspect of guiding the non-advised into better decisions.
The FCA also delved into non-workplace pensions. A large thrust of its work was centred around charges. However, HM Revenue & Customs rules mean it can be difficult for some people to transfer to a new-style contract, particularly without losing tax-free cash protection.
The ever-elusive pensions dashboard
The pensions dashboard was another subject that attracted a lot of coverage in 2018. It felt like we spent a large part of the year simply waiting for direction on how the dashboard would take shape.
We now know the pensions industry will build the dashboard, under the watchful eye of the single financial guidance body.
We also know that it will start with a single dashboard but then move to multiple versions, and that state pensions won’t be included from day one. The Department for Work and Pensions hopes most schemes will be able to supply data by 2023 and will work with the industry to phase in compulsion.
Finally, 2018 was the year the UK achieved state pension age equality. However, the state pension age of 65 is already set to increase to age 66 by October 2020.
So, despite the stability around pension tax relief, there was still considerable change. And history tells us that shows no sign of letting up in 2019.