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What has 2020 meant for the pension industry?

COVID-19 has upended every element of Britons’ lives throughout 2020 – and retirement strategies have been no exception.

The virus has driven changes in many people’s employment statuses, with My Pension Expert’s recent survey of over 920 UK adults aged 40 and over revealing that one in ten (9%) of respondents aged between 40 and 67 have been forced to take early retirement.

Given the potential for employment and financial situations to change rapidly, there has been a much greater need for flexibility when it comes to accessing pension pots. Consequently, over the past twelve months, more consumers have been demanding less regimented products such as Flexible Drawdowns over more traditional annuities.

These trends have been well-reported in the national press throughout 2020, with My Pension Expert also offering insights into the ways in which Britons can overcome pension panic in the wake of the coronavirus pandemic, as well as the various benefits and drawbacks of annuities and Flexible Access Drawdowns.

However, it is not just COVID-19 that has shaken-up the pensions sector in 2020. This year has seen numerous other pension policy changes, which may have slipped under the radar…

RPI Changes

On the 25th November, all eyes were on Chancellor Rishi Sunak as he announced the Government’s Spending Review. However, following the main announcement, the Government quietly released documents which announced reforms to the Retail Price Index (RPI) – which is currently used to calculate inflation increases for financial products – due come into place after 2030.

The reforms will involve aligning the RPI with the Consumer Prices Index, including owner occupiers’ housing costs (CPIH). This is measured differently to the RPI and tends to be approximately 0.8% lower, which will have a knock-on effect on retirement finances.

Indeed, the likes of final salary pensions and some annuities, which see their value rise directly in relation to the RPI, will likely experience a much slower growth rate. Consequently, it will likely force many consumers to rethink their existing retirement strategies.

Pension freedom age changes

Another development in 2020 has been the Government’s confirmation that the age at which people can access their pensions will increase from 55 to 57 in 2028. This age increase had been touted since 2014, although legislation was never formally introduced.

However, in September it was confirmed in a parliamentary questions’ session that legislation for this age increase will be presented “in due course”. According to the economic secretary to the Treasury, John Glen, the increase in minimum age is reflective of trends in longevity and aims to ensure that pension savings can provide for later in life.

New consultations

Whilst it might not have attracted national headlines, another important event for the pension sector is the Government’s new consultation on restructuring pension schemes’ general levy.

This consultation, which will close on 27th January 2021, outlines three potential options to increase the general levy on occupational and personal pension schemes. Although, the Government has voiced its preference for one option, which would involve increasing rates but introducing separate levy rates for defined benefit (DB), defined contribution (DC), master trust and personal pension schemes. 

Of course, this does not mean that any changes are set in stone as yet. It is clear the Government wants to gauge public and industry opinion before committing to any major changes. However, it is clear that policy makers are keen to drive further change within the pension sector – so watch this space.

What do these changes mean for savers?

Overall, the most pressing question is how will these proposed changes impact current and future generations of retirees?

It is highly likely that they will provide many individuals with the incentive to review and update their retirement strategies. This may involve beginning saving earlier, or even diversifying their existing pension investments.

Of course, it will mean that more and more savers will require financial advice. The pension industry is complicated, and these changes will likely add further levels of complexity, so savers would be wise to seek tailored advice from a regulated expert before making a final decision about their retirement finances.

Whilst the Government has given plenty of notice for many of these changes, future generations of retirees must do what they can to prepare. Starting to save as early as possible is a good start, however, it is of the utmost importance to seek independent financial advice. Doing so will ensure that pension planners are able to secure the best possible outcome when they decide to retire.