The new State pension: how will it affect you?

A third of people aged over 50 who are employed in the private sector are now planning to retire later than they previously hoped, Aviva’s latest Working Lives report reveals. The 2016 report – which comprises research among UK private sector employers and employees – has a particular focus on employees aged over 50, following the end of compulsory retirement and with the first anniversary of the ‘pension freedoms’ approaching.

In particular, the Aviva Report survey asked people what age they hoped they would retire at, before they turned 40. Now, aged over 50, more than one in three (36%) admitted they would be retiring later than they thought – by an average of eight years. Among those who will now retire later than hoped, the report found a variety of reasons for people to postpone their retirement plans:

Not saving enough into a pension – 46%
The amount available through the state pension – 32%
I have debts to pay off (including mortgage) – 24%
Feeling that I still have a lot to offer at work – 21%
The level of enjoyment/satisfaction I get from my work – 20%
My employer wants to keep me on – 13%
Position of my partner – 13%
I have children who need financial support – 8%
I have elderly relatives who need financial support – 1%
Other – 10%
None of these – 3%
Don’t know – 2%

The Working Lives report also reveals a gap between employers’ and employees’ views on the impact of the pension freedoms, as the first anniversary of their introduction in April 2015 approaches. Over one in five (22%) employers think the freedoms could result in their employees having to work longer to make up for a shortfall in savings if they use part of their pension before retirement. At the same time, almost one in three (32%) employers are concerned they will lose valuable skills because people will retire earlier due to the freedoms.

However, these fears may be unfounded as the vast majority of employees aged 50 and above do not intend to alter their plans because of the pension reforms. Only 8% highlighted that the freedoms will result in them retiring earlier, contrasting with the concerns employers have around loss of skills. One in ten (11%) employees over the age of 50 now think they will retire at a later date because of pension freedoms, while 9% still remain unsure as to what the eventual impact of the freedoms will be upon their retirement plans. Seven in ten (71%) stated they have no plans to retire or that the pension freedoms have not affected their expected retirement date.

Aviva’s Working Lives report also questioned 500 private sector businesses of different sizes about a number of issues, including how prepared they are to deal with changing retirement patterns following the scrapping of the Default Retirement Age and the introduction of pension freedoms. The findings suggest the majority of businesses do not have plans in place, and that they are less prepared for staff retiring later (just 25% have plans for this) than they are for staff retiring earlier (29% have plans in place).

Even among large companies (250+ employees), less than half (42%) have plans in place should their employees retire later than expected, compared to 14% across both small and medium sized businesses. Likewise, only 48% of large businesses have plans to cope with staff starting to retire sooner than expected, compared to just 17% of medium sized businesses and only 15% of small businesses.

With many over-50s facing a later retirement than they hoped, the Working Lives report nevertheless found encouraging signs that levels of job satisfaction were highest among those aged over 65. A large majority (86%) of private sector workers in that age group said they enjoy their work, compared with just 57% of those aged 18-64. A similar proportion (85%) also said they get a sense of satisfaction from work, while 81% reported being valued by their employer – again, much higher than the younger age groups combined (57%). This backs up the suggestion that there are positive reasons for people wanting to stay on at work.

Before the March 2016 Budget there had been much speculation that the Chancellor was planning big changes to the tax relief on pensions. However, just before the Budget, the Treasury scotched rumours of such changes and subsequently there were no changes to pension savings tax relief in the forecast Budget.

But then came the ‘Black Hole’ when the opposition to proposed welfare savings, particularly in the disability benefits area, spearheaded by Iain Duncan-Smith’s resignation, derailed the Chancellor’s fiscal plans. The connections were easily made between his proposed higher rate income tax reductions for the rich and the benefit cuts for the less well-off, clearly unpalatable to many in the House of Commons. So there was a U-turn on welfare benefit cuts, even going so far as a promise of no more raids on welfare benefits in this parliament.

So where can the Chancellor look for cash to fill the Black Hole, to get his fiscal policy back on track? Earlier this year, a lot was being said about pensions savings tax relief being unfair, favouring higher rate taxpayers and therefore making this a legitimate target. This was ignored by the Chancellor in the Budget, though, prompting many commentators to suggest that the coming EU Referendum and the need for the Government to keep Conservative EU membership supporters happy and not antagonise the ‘Brexiters’ on the Tory back benches was a priority, at least until 23rd June!

Currently, when savers pay into a pensions scheme their contributions are boosted by tax relief at the rate they pay on their earnings, which can be as much as 45%, and figures from the government show that more than two-thirds of the current £34 billion pensions tax relief goes to higher rate – 40% and 45% rate taxpayers. Such a distribution is widely perceived to be unfair and by many observers, ineffective in encouraging people to save.

After the Referendum, changes to pension savings tax relief could soon come. After all, having the Budget put comparatively more money into the pockets of the rich (according to the Institute of Fiscal Studies), it would then be politically timely and expedient to take all of that, or at least some of it, back in the formulation of a ‘fairer’ pension savings tax relief set of arrangements.

If we stay in the EU, the weighted pension savings tax incentive for higher rate taxpayers will have served its purpose, as will the little extra tax relief money in their pockets, so we can restore the balance, helping the less well off in society. Even if the Brexiters win, the money can still be taken back, perhaps with a convenient political justification that our impending exit has brought about the change.

The value of your investment can go down as well as up and you may not get back the full amount you invested. The value of tax reliefs depends on your individual circumstances.

There’s a lot that’s likely to change about your pension in the near future, which in turn will have an impact on all sorts of other factors regarding savings for your retirement. Depending on what changes the government imposes on how pensions are taxed and the amount of tax relief allowed on pension contributions, you may end up needing to pay considerably more each month towards your pension, or even end up working several years longer before you can retire.

One idea that the Chancellor was toying with in 2015 – and which many predict he may still impose this year – was a change to make pensions more like ISAs. Under the current system, contributions are tax-free when you pay them into your pension, but are then taxed whenever you make a withdrawal.

The suggested change would essentially reverse this process: any pension contributions would have been taxed before being paid in, but would then be subject to no further taxation when a withdrawal is made. As stated earlier, this proposed shift would make a pension very similar to an ISA, which could spell the end of pensions as we know them. It’s predicted that many earners may move away from a new and unfamiliar form of pension in favour of the well-established ISA system for their nest egg.

According to a survey carried out by a leading online investment site, one in three people said they would move their savings to an ISA should the proposed taxation changes be brought in. Only 20% of people said they would continue putting their savings into a pension at the same level. Another popular alternative that many suggested they would consider is investing in property rather than placing their money into any form of savings scheme.

As George Osborne has already stated that he’s open to “radical change” when it comes to the pension system, it’s possible that he may opt to scrap pensions altogether, forcing earners to save for their retirement in some other way. Only time will tell, as an announcement on the future of pensions is expected soon, possibly as part of March 2016’s Budget.