Pension changes in 2016: from tax and the New State Pension to auto-enrolment and an end to contracting-out
The next 12 months will see another round of significant changes for pensions.
HM Treasury has plenty of adjustments lined up for British pensions over the next 12 months.
Here's how these changes could affect you and your pensions in 2016.
Tax changes
HM Treasury has already legislated for several changes to how pensions are taxed, while others may be announced at the next Budget on 16 March.
Already coming in the 2016/17 tax year is a reduction in the Lifetime Allowance from £1.25 million to £1 million, which will hit high earners and long-serving scheme members. Also, the Annual Allowance taper for higher earners will potentially reduce maximum contributions eligible for tax relief to £10,000. However, this restriction will only hit those earning six-figure salaries and above.
Further changes may include another review of pension taxation (expected in the Budget speech), the long-mooted abolition or reform of pension tax relief and measures to help investors facing pension-exit penalties to access the pension freedoms granted in April 2015.
State Pension reform
On 6 April 2016, the New State Pension launches, initially worth £155.65 a week. The idea is that it will simplify the current State Pension system in order to distribute benefits more evenly, but millions of Brits are confused about exactly how this will work.
Even the Government has admitted that the benefits of the New State Pension have been mis-sold.
An end to contracting-out
April 2016 also sees the end of contracting-out for final-salary pension schemes. Ending these diverted payments will result in higher National Insurance contributions for scheme members. With almost all final-salary pension schemes in the private sector now closed, this will largely affect the five million public-sector workers enjoying taxpayer-backed pensions.
For employees, this change will increase their contributions by 1.4% on incomes between £8,060 and £42,380, which works out at up to £40 a month in extra tax. For employers, the impact is even worse, with their contributions rising by up to £97 a month per scheme member. That adds up to a lot of extra tax to pay for millions of workers.
Auto-enrolment
Auto-enrolment (or workplace pensions) really steps up a gear in 2016, with a herd of smaller employers joining the larger organisations that have already had to open pensions on their employees behalf. By the end of 2016, more than 500,000 employers will have gone through staging, with an estimated 156,000 employers hitting their staging date in the last three months of next year. This will lead to millions of British workers being enrolled in workplace pensions, some for the very first time in their working lives.
Check out Workplace pensions: what it means for you.
Financial advice
The Treasury and the Financial Conduct Authority (FCA) will jointly report their pension advice and guidance review in time for next March's Budget. This may free up access to low-cost simple advice and guidance, in order to help people plan their finances.
As 2016 progresses, the regulator will publish further research and guidance on helping and protecting pension investors.
Your New Year pension resolutions
After seismic changes in 2015, next year looks to be yet another year of upheaval for UK pensions. Here are some simple steps British workers can take to start building a brighter retirement in 2016, courtesy of Tom McPhail at Hargreaves Lansdown.
First, contact your pension providers to get private pension forecasts. If you’re not on target for an income you’ll be happy with, then look into what you can do to improve it. Your options include increasing contributions, retiring later and making changes to your existing arrangements. Thanks to a technical change to the Annual Allowance (aligning Pension Input Periods with the tax year), you may be able to put a lot more into pensions this tax year than usual.
Get a State Pension forecast. The State Pension changes radically in 2016, so now is a good time to find out what you can expect in return for your contributions.
Next, review your pension investment choices, especially if you have been auto-enrolled into a default fund. Most default funds will not be the best investment strategy for each and every worker. If you are eligible for a workplace pension and you haven’t already joined, then look at doing so. After all, it is free money from your employer, so not joining your scheme is the same as turning down a pay rise!
Now it's time to review your pension charges. Pensions have been constantly evolving, and while yours may have been right for you when you started it, it might not be your best choice now.
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