In the world of pensions, 2018 will be remembered for master trust authorisation, a mammoth task that we have nicknamed ‘the project that keeps on giving’.
The exercise has been rather like standing in front of a huge mirror and painting our own self-portrait. Except that The Pensions Regulator doesn’t want the usual artist’s embellishments; it wants a ‘warts and all’ story, rather like the famous portraitist Joseph Wright used to paint, often to the annoyance of those who had commissioned him.
But without a shadow of a doubt it’s been worthwhile.
On a less positive note, 2018 was also remarkable for the Financial Conduct Authority (FCA) statistics that revealed the dash for cash under the pension freedoms was not just an initial effect in 2015 of pent-up demand. Its data reveals the most popular choice at retirement remains cashing in the full pot. In second place comes income drawdown, and this today outscores the third place annuity by around three to one.
On a particularly worrying note, for those that don’t cash it all in one go, the average rate of drawdown is to take 8% of your pot each year. You don’t need to be an actuary to realise that with the average length of retirement being nearly 25 years, the money simply won’t last that long. After 30 years in the pensions industry, I now feel we may need to rename our industry to something else, like the “save till 55 and then cash it all in” industry.
Looking forward, the big ticket for 2019 is auto-enrolment phasing with employee contributions reaching 5% of qualifying earnings. At last, coupled with another 3% from employers, we will start to see meaningful amounts being saved by the 10 million new savers that this huge social experiment has brought us. It’s a shame it took seven years to get here, but better late than never.
As a master trust we have a ringside seat and will be watching the weekly payrolls in April and the monthly payrolls from April/May onwards as the story unfolds. In last year’s phasing hardly anyone threw a tantrum; a mere 0.2% of people stopped contributing as the increased pension contributions were taken from pay packets.
We were helped by the chancellor, who gifted many people with pay rises at the start of the new tax year with an increased personal allowance and a hefty wedge on the National Living Wage. Guess what, ‘spreadsheet Phil’ has pulled the same stunt again for 2019, soothing the potential pain of those 5% contributions next April.
But there’s a side effect to these increases. The amount of tax relief lost by the more than 1.2 million members of net-pay schemes who earn less than the Income Tax Personal Allowance is increased too. From 2019/20 this quirk of the tax system will deny them £64 a year compared to the gift the Treasury would give them if they happened to be in a relief-at-source scheme. That’s enough money to feed a family for a week, or to pay for the kid’s school uniform.
The people missing out are part-timers, and that means around three-quarters of them are women. It’s one of the reasons why the gender pension gap is wider than the gender pay gap – a subject we’re keen to shine more light on in 2019.
The national press has woken up to the net-pay anomaly, and the fact that HMRC are in possession of all the information to solve it and give these people their money back. I think 2019 will be the year that this inequality becomes just too awkward for Treasury ministers to ignore any longer.
My final prediction for 2019 is that the Lifetime ISA (LISA) will have its own lifetime curtailed and be pulled for new subscribers during next year. After all, it’s hardly a lifetime product when you can’t start one after age 40 or pay in after age 50. What about life’s second half?
While LISA has been popular with first-time buyers saving a deposit for house purchase, it’s become pretty obvious that if you throw hungry buyers a dollop of cash, all that does is push up the prices. I detect a growing understanding among all political parties that if we really want to solve the housing crisis for the next generation, what’s needed is to build many more homes, and build the infrastructure that expanding towns and cities need to go with the extra housing.
Which brings me nicely back to pensions. As long-term investors, we have the means to fund the necessary national investment in living space for our growing population. In 2019, we’ll see greater use by pensions of illiquid long-term assets and less slavish adherence to the need for daily pricing.
Adrian Boulding is director of policy at NOW Pensions