This article looks at what could lie ahead following recent reform to the UK's pension system.

The new British pension freedoms have seen wealth managers across the country bulk up their retirement offering and capitalise on the surge in demand for advice. As part of the Summer Budget, chancellor aka finance minister George Osborne suggested further reform, in the form of a shift towards an Individual Savings Account (ISA)-style tax regime for pensions, whereby people have tax-free retirement pots topped up by the government. In this article, Mark Vasey, head of strategy and proposition, wealth and advisor solutions at Pershing, discusses the evolving pensions landscape and talks of a new generation of retirement solutions. The editors of this publication welcome this contribution and invite readers to respond.

George Osborne’s pension freedoms have continued to increase public awareness of the challenges retirees face, as well as encouraging individuals to seek financial advice and to take responsibility for their own financial wellbeing. 

While the post-retirement impact of the July announcement was widely heralded, the underlying consequence is that people must plan for retirement more effectively during the accumulation stage of their lives. 

Increased tax-free saving opportunities through a recently increased annual ISA allowance combined with the narrowing of pensions owing to a reduced annual and lifetime allowance, raises the need for a single retirement strategy combining both savings and pension assets.

A shift from the traditional system – known as Exempt, Exempt, Taxation or EET – to a more progressive system of marginal rate taxation of contributions, balanced with tax-free growth and income, appears to be underway. 

The gap between the cost of funding pension contribution tax relief and the tax the government receives when pensions are taken continues to widen. Government figures place the net cost to the Exchequer of providing the current system at more than £20 billion ($31 billion) in 2013-2014. Further progress to a wholly taxed contribution solution is likely to be announced following the government’s green paper "Strengthening the incentive to save", a consultation reviewing the current pensions tax relief. 

Introducing a taxed contribution system – Taxed, Exempt, Exempt or TEE – would result in greater freedom and control for the investor during the accumulation phase. We could see a simple, ISA-like account that could potentially follow a saver throughout their working lives. The need for expensive pension consolidation could be reduced or eventually removed and the freedom to invest in a wider range of products may surface. The obvious potential downside for investors is a reduction in the initial capital to invest due to the taxation of contributions and a reliance on future government to maintain the tax-free status of income. 

It has been suggested there could be a “top-up” payment, meaning that some but not all of the incentives to save for retirement will remain. The key will be to make changes that are understood and gain public support. When people are contemplating how long their pension savings might last in retirement, they would not have to factor in tax complications, making it much easier to understand the financial benefits of pension saving.

There is a need for a single retirement strategy. Any changes made to tax relief will hopefully provide greater investor freedom as influence shifts from corporate pension schemes to investor-led savings, which in turn means a greater need for advice. While providing investors with flexibility, freedom and greater control of their retirement savings is a positive move, it is essential that long-term financial security remains.

Demand for professional advice will increase, further challenging a sector already struggling to recruit new talent. The new “simpler” world may actually create an entire generation with complex financial lives, previously a concern reserved exclusively for high net worth investors. This creates opportunities for wealth managers, and new providers may emerge. Future pension consultants and advisors will be specialists in bringing together diverse investments and presenting a single view of the investor’s future. 

Next-generation retirement solutions will require a new generation of consultants and platforms. Flexible solutions capable of managing all forms of pension and savings products will evolve, allowing DC (Defined Contribution) and DB (Defined Benefit) schemes to be reflected alongside taxed and tax-exempt savings and investments. The whole of financial life management will be key.