How the coalition reformed pensions

As we approach the first anniversary of the coalition government, Mike Morrison looks at how it has reformed pensions

This time last year we were beginning the build up for the General Election in May, not knowing who was going to win. I am fairly confident that most people would not have guessed we would end up with a coalition, let alone that the coalition would still be going after a year!

So, one year on, and in the pensions world specifically, what has the coalition done for us?

Well, quite a lot I think. I cannot think of any part of the pension world that has not been consulted on, reported on or discussed in detail.

Let's look at the big changes that have been confirmed.

New tax relief rules
From 6 April 2011 we had new rules on tax relief and the level of contribution that can be made into pension schemes.

We expected change. The stated aim was to better target higher rate relief and to save some money and there was even talk of removing higher rate tax relief totally. What we got was a reduced annual allowance of £50,000 per annum, full tax relief and the unexpected bonus of three years carry forward of unused relief.

So far, this has generally been well received by the pensions industry, but the spectre of tax charges for people in defined benefit (DB) schemes still lurks, even though the tax can be paid in most part from the pension scheme - another consultation.

Income drawdown
Also from 6 April 2011, we had new rules for income drawdown and the so-called abolition of the requirement to annuitise. Again this was very much signposted in the manifestos as a political aim. The new concept of flexible drawdown is a radical step forward and it will be interesting to see how it figures in the post-retirement market and, similarly, the future of income drawdown and annuities.

Moving to the bigger picture and one of the key pension issues of our time: the perceived value of public sector DB pension schemes. Again, I feel that considerable progress has been made with Hutton's interim and final reports, and the recent Budget confirmation that this has been accepted by the coalition and can now be used for negotiation. Now the hard work starts: reforming something that is so entrenched in the system.

Similarly, the national employment savings trust (NEST) and auto-enrolment have been reviewed and, subject to a few tweaks, are scheduled to commence as timetabled, although the likely success of this project is still being vociferously questioned.

As I write, we have just had the coalition proposals on state pension reform with a new flat rate pension and possibly the ending of means testing. Again, this is a complex subject but the idea of a flat rate pension for all and the end of means testing must be a positive step forward albeit needing a few years to implement.

Added to the changes outlined above are the proposed increase to the State Pension age and a mechanism to justify future changes, and the abolition of the default retirement age, both of which make sense in light of the increasing longevity statistics that continue to emerge.

Some other changes have not been so popular, such as the change of basis of indexation from retail price index to consumer price index.

Looking ahead
For the future, we have the consultation on early access to pensions. It will be interesting to see the result. Research from AXA Wealth shows a number of mixed messages but the conclusion seems to be that early access needs a lot more work. Also ahead are the findings of Lord McFall, who has been commissioned to look at the retirement regime and the results of the enquiry into future funding of long-term care.

Action is one thing, results will be another and to use the old adage - the proof of the pudding will be in the eating. Will we see the right results? That's where I still think the jury is out. What will success look like? A simpler system, less legislation, more people engaging and saving, and recognition that retirement is a long-term project.

We are not there yet, but I think we are on the right track and it is important that we do not let such a good start to fade.

Mike Morrison is head of pensions development at AXA Wealth