The key pension reforms (and what they mean)

One year, seven key developments, but is the coalition doing right by pensioners?

October 2010: Reducing the annual allowance (AA) and lifetime allowance (LTA)
In October, the Treasury announced the AA would fall from £255,000 to £50,000 and the LTA would fall from £1.8m to £1.5m in April 2011.

Analysts had predicted an AA as low as £40,000 and so were pleasantly surprised. There are now fears government plans to combine income tax with national insurance in a basic rate of 32% will complicate tax relief again, but the government said this will not happen for several years.

October 2010: Raising the state pension age (SPA)
The government announced during the October Spending Review that the SPA will rise to 66 by 2020 instead of 2026.

Equality groups were angered by women’s SPA increasing more quickly than men’s, and the public has not been receptive to the change. The industry, however, has welcomed it as sensible.

The government now plans to link the SPA directly to longevity, which will increase it automatically, to avoid public outcry over every future increase.

December 2010: Removing the requirement to annuitise at age 75
As an interim measure, the government lifted the age to 77 in June 2010, and the requirement to annuitise was completely removed by April 2011 after December’s consultation. The paper also introduced flexible and capped drawdown.

Income drawdown had been available post-75 in a restricted form as alternatively secured pensions. The change was welcomed as a move towards personal freedom, and the new rules around drawdown were seen as enough to prevent pensioners exhausting their funds.

There are rumours the setting of a minimum income requirement (MIR) of £20,000 annually was a test for future plans to set an MIR for any drawdown arrangement, but this is unconfirmed by HMRC.

January 2011: Ending the default retirement age (DRA)
The government announced it will abolish the DRA of 65 by October 2011. Employers can no longer retire workers on the grounds of age.

The decision was hailed by Age UK as a triumph over employment ageism, but the CBI was disappointed. The pensions industry saw the change as an inevitable extension of working lives due to rising longevity.

Saga director general Ros Altmann called for a “social revolution” in which older people are further supported and encouraged to work part-time rather than fully retiring immediately.

March 2011: Lord Hutton’s public sector pension report
This recommended an end to final salary schemes and shifting public sector workers towards career average arrangements by 2015.

The change was lauded by the public as a cost-saving measure, but attacked by unions as unfair given the other cuts to the sector.

There were criticisms that MPs’ pensions should have been reformed at the same time, but this has been delayed.

April 2011: Universal State Pension
This live consultation paper on a flat rate, £140 per week pension proposes an end to contracting-out and means testing from 2015.

Given this paper had been expected in December it was not a surprise. It was hailed by the industry as the only way to fix a system so complicated HMRC cannot administer it.

There is widespread disappointment the pension will not be offered to current pensioners, but Webb is unlikely to complicate the situation with any extensions.

April 2011: Early access to pension funds
The government consulted from December to February on allowing access to pensions before age 55. In April, the Treasury announced it would not consider any form of early access as it would not improve pension saving and would overburden the industry.

The industry had not expected such a radical change, and it was suspected the consultation was for political show. Insurers welcomed the move, having feared an administrative nightmare, and advisers said it was no great loss.

The Treasury said it would not consider early access at this time but there are rumours it may be revisited in five to ten years’ time.