What you need to know about pensions in 2019: How the Brexit drama and state pension delays may affect you
Brexit looms over everyone’s financial future as politicians wrangle over how – or even still whether – to exit the European Union.
For pensioners and people saving for old age, the most immediate impact of Brexit will be on their investments if that is how they are funding retirement.
Markets are in turmoil for many reasons as we enter 2019, and further volatility is anticipated around the March departure date from the EU. We look at what might happen and which pension savers could be most affected below.
Pensions in 2019: Government has stuck to its ‘triple lock’ pledge and will hike the state pension to £168.60 a week in April
State pension age changes have started kicking in for men as well as women, with everyone reaching their 65th birthday now facing a delay before getting their payments.
But the Government has so far stuck to its ‘triple lock’ pledge guaranteeing the elderly an annual state pension increase of at least 2.5 per cent.
The auto-enrolment initiative has seen continued success, despite concerns that a hike in minimum compulsory contributions last spring could cause a wave of opt-outs from work pension schemes.
This failed to materialise, and has allayed concerns about the effect of a further mandatory increase in contributions pending this April.
As Brexit dominates the political scene, the Government has still failed to bring forward a promised social care plan that replaces its much-panned idea to introduce a £100,000 ‘floor’ on personal contributions.
However, in December it did announce some long-anticipated measures to ‘nudge’ the self-employed to provide for retirement, and finally gave a start date of 9 January for a ban on pension cold calling to combat scammers.
We delve into some of these issues and others in greater depth below. It’s worth finding out more about such pension matters and how they might alter your plans for old age. Here’s what you need to know.
Brace for investment volatility – but UK market could ultimately triumph in year of Brexit
The present turmoil in the financial markets – and further likely volatility around the Brexit date – will impact many pension savers, though to different degrees according to your age and where your savings are stashed.
What does 2019 have in store for investors?
Watch our interview on how to shield yourself from Brexit – and some markets tipped to prosper
Younger people who are still investing for retirement can afford to take a more relaxed view of the current turbulence, even if there is a truly disastrous crash in 2019.
When you are slowly drip feeding money into pension investments month by month, big market falls are a useful opportunity to buy stocks on the cheap, then benefit from the recovery that will turn up long before you retire.
The pension savers most vulnerable to market strife are retirees who invested their pots in income drawdown schemes after the pension freedom reforms in 2015.
Markets have been mostly buoyant since then, which may have lulled some into a false sense of security about investment risk – particularly those who were not active or interested investors while building savings during their working years.
A market upset could unfortunately provide a practical lesson to many on managing their retirement investments through a crisis.
It is not a good idea to simply carry on as normal in such times. This is because people who continue to draw an income from falling investments will fall into a nasty trap known as ‘pound cost ravaging’.
It basically means that when markets fall you suffer the triple whammy of falling capital value of the fund, further depletion due to the income you are taking out, and a drop in future income.
How to protect your retirement income in troubled times
Find out the ways to dodge the ‘pound cost ravaging’ trap here.
This poses a problem every time markets take a tumble, but is especially dangerous at the start of retirement because investors can rack up big losses and never make them up again if they aren’t careful. We look at ways to avoid the worst fallout from this here.
Pension experts say people should be sent warning letters if they are at risk of running out of money in retirement. At present, only one firm does this automatically, but regulators and the Government might be forced to act if many people’s pots take a severe hit in a market downturn.
So far, concern is being voiced about people taking too little risk with their pension investments, by going into income drawdown and sticking their entire pots in safe but often costly cash funds, but priorities could soon change in a more adverse financial climate.
Meanwhile, those lucky enough to be already drawing a final salary pension get guaranteed payouts and can ignore any market gyrations, as can those who bought an annuity offering similarly guaranteed payments for life.
Anyone with a final salary pension who is yet to retire should also be fine, as long as the employer meant to fund it doesn’t go out of business. Even then, the Pension Protection Fund will save most of your money.
Of course, the present market ructions might soon subside. Many pundits think the UK market is undervalued and might be heading for big gains in the year of Brexit.
State pension increase due but retirees turning 65 must wait longer for payouts
The flat rate state pension will rise to £168.60 a week and the basic rate to £129.20 a week in April. But both men and women reaching their 65th birthday from December 2018 on will have to wait longer to claim their state pensions.
Previous hikes to women’s state pension age from 60 to 65 have already sparked controversy as many have faced financial hardship while they wait longer than they expected to draw the state pension.
Campaigners say they agree with equalising women’s and men’s pension ages, but not how the changes were dramatically speeded up by ex-Chancellor George Osborne or the lack of warning to those affected.
Delays to the state pension are unpopular, according a survey by Age UK which showed 58 per cent of people feel negative about the changes while only 7 per cent feel positive.
How much is the state pension?
The basic state pension is currently £125.95 a week, and will rise to £129.20 next April. It is topped up by additional state pension entitlements – S2P and Serps – accrued during working years.
The two-tier state system has changed for people retiring since 6 April 2016, when it was replaced by a new ‘flat rate’ state pension. This is currently worth £164.35 a week, and will rise to £168.60 in April.
People who have contracted out of S2P and Serps over the years and retire after April 2016 get less than the full new state pension.
Workers likely to shoulder new compulsory auto enrolment rise
Millions of workers auto-enrolled into pensions saw deductions from their wages triple last April, and even more money will be diverted from their pay from this spring.
The response of workers was closely monitored, as a widespread revolt could have undermined the so far successful auto enrolment experiment into nudging workers to provide for their own retirement, unless they actively choose not to participate.
But the Government recently reported that the opt out rate did not change in April and June this year, when workers’ minimum compulsory contribution was hiked from 0.8 per cent of eligible earnings to 2.4 per cent.
This bodes well for the next increase in the minimum contribution to 4 per cent of ‘band earnings’ – the portion of people’s wages that falls under the auto enrolment rules, currently between £6,032 and £46,350 a year and due to change to between £6,136 and £50,000 in April.
Free top-ups from employers plus Government tax relief (for all except some low earners – see below) mean that millions of workers will soon see at least 8 per cent of their ‘band earnings’ put aside for retirement in future.
‘While employees will see this reduce their take-home pay, it’s really important that people keep saving,’ says Steven Cameron, pensions director at Aegon.
‘Otherwise, they lose out on valuable employer contributions and are likely to find they have an inadequate pension when they come to retire.’
Who pays what? How pension contributions stack up under auto-enrolment schemes (Source: The Pensions Advisory Service)
Auto enrolment: Opt out rate did not change in April and June after rise in minimum contribution level
Government under pressure to fix ‘cruel’ tax quirk hitting pensions of low paid
A swelling number of low paid people are being deprived of Government pension tax top-ups routinely received by the better off, a scandal we have repeatedly highlighted since last spring.
This tax quirk is variously dubbed ‘cruel’, ‘indefensible’ and an ‘injustice’ by campaigners and industry experts.
Yet nothing has been done so far to fix this for poorly paid people, who are missing out on Government pension cash that relatively speaking they will be in sorer need of in retirement than higher earning workers.
Give dukes and dustmen the same pension boost
Ex-shadow minister Gregg McClymont warns the Government to play fair on top-ups here.
That’s never mind the unfairness of penalising the worst off workers while the rich get their full whack of pension cash.
Former shadow pensions minister Gregg McClymont drove this point home when he told politicians they must give dukes and dustmen the same pension boost.
The tone of the Government’s statements has shifted, albeit marginally, since This is Money started reporting on the issue. ‘We recognise the differences in the way tax relief is delivered. Both approaches have advantages,’ it said in April.
‘The Government is looking at the opportunities provided by the move to a modern digital tax system to tackle any differences of treatment in provision of tax relief for pensions,’ was its response in December.
That came as it emerged the number affected is set to rise from 1.22million low paid people missing out on Government pension cash to more than 1.8million due to tax changes from April.
A business source tells This is Money that because the issue was ducked in the last Budget – despite an alliance of two ex-Pensions Ministers, industry experts, a leading charity and the TUC urging action on Chancellor Philip Hammond – it’s likely nothing can now be done to sort this out until the next Budget in the Autumn.
Ros Altmann, who has spearheaded the campaign to get low paid people the same tax top-up as richer workers, has vowed to keep fighting until she and a growing band of supporters win this battle.
Tax quirk: Low paid people, mostly women workers, are being deprived of Government pension tax top-ups received by the better off
Will new top regulator be an ‘enforcer’ who averts next BHS or Carillion pension disaster?
Rising numbers of people continue to abandon guaranteed and typically generous final salary pensions, despite safeguards erected by watchdogs.
Savers are being offered gigantic sums – often worth vastly more than the current size of their final salary pensions – by employers keen to clear expensive obligations off their books.
Whether this is a sensible idea will rest on your individual circumstances. Pension firm Aegon explained what questions you should ask yourself if you are tempted to do this, before forking out for professional help.
It is compulsory to pay for financial advice before transferring a final salary, also known as defined benefit, pension worth £30,000-plus.
The Financial Conduct Authority has told financial advisers to improve the help they give savers after uncovering widespread failings, which at worst could be leaving them at risk of moving pensions to scam schemes.
Final salary pensions: Some savers are being offered gigantic sums by employers keen to clear expensive obligations off their books
But a decision over ‘no transfer, no fee’ offers to savers, which critics say cause conflicts of interest, was postponed for now.
Meanwhile, in the wake of the BHS debacle, employers are still being accused of dumping responsibility for staff pensions on the lifeboat Pension Protection Fund.
A new boss has just been appointed to The Pensions Regulator, after the watchdog under his predecessor was decried as ‘feeble’ and ‘chronically passive’ by MPs probing the collapse of Carillion.
Charles Counsell, currently chief executive of the Money Advice Service, will take over in April and is described as ‘a delivery-focused leader’ with ‘energy, determination and passion’ by TPR.
Alison Brown, pensions specialist at professional services firm Herbert Smith Freehills, expects a tougher regulatory environment in future. Just prior to Counsell’s appointment, she anticipated an ‘enforcer’ being given the role.
‘Following criticism in the wake of the failures of BHS and Carillion, the Pensions Regulator has signalled its intention to adopt a tougher approach to pensions regulation,’ she says. ‘Scheme sponsors will need to adjust to a new regulatory climate.’
Brown expects employers to continue ‘de-risking legacy liabilities’, after 2018 saw records broken in the pensions buy-out market, where insurers are being paid huge sums to take over firms’ final salary pension obligations.
Consolidation, or mergers of final salary schemes into ‘superfunds’, is also on the cards. The Pensions Regulator has pledged to thoroughly vet any future superfunds ‘to ensure any risks are identified, assessed and mitigated’.
‘So TPR can scrutinise superfunds ahead of legislation they will need to be satisfied the superfund: has a viable business model; is financially sustainable; is well governed; has a high probability of being able to pay members’ benefits as they fall due,’ it said.
Child benefit campaign: An innocent paperwork blunder after giving birth shouldn’t cost parents tens of thousands of pounds in old age
Government urged to stop docking parents’ state pension over innocent child benefit errors
This is Money is campaigning against the unfairness of parents ending up with smaller state pensions because they failed to fill in a child benefit form or made innocent paperwork errors.
Have you lost state pension by not signing up for child benefits or filling form in wrong?
If this has happened to you, contact firstname.lastname@example.org and tell us your story.
We have called on the Government to address this after hearing from many parents who stand to lose tens of thousands of pounds in old age due to losing valuable credits towards their state pension.
When they try to correct their child benefit record, they discover the Government will only backdate credits by three months, or get entangled in nightmare red tape disputes with HMRC.
This is Money is calling on the Government to 1) give parents back all the state pension credits they are entitled to in full; 2) review the feasibility of parents signing up when registering a birth not through the child benefit system; and 3) do more to help parents penalised for putting the ‘wrong’ partner’s name down on the form.