Tomorrow (14th May) marks the five year anniversary of the Pensions Act 2014 coming into force, ushering in a series of far-reaching retirement changes.
Tom Selby, senior analyst at AJ Bell, considers how three significant reforms brought about by the act have affected savers.
Single-tier state pension
“Former pensions minister Steve Webb’s radical overhaul of the state pension was arguably one of the most significant reforms introduced by the Coalition Government.
“The previous system was, frankly, a mess, with means-testing and contracting-out rules making working out exactly what you were entitled to almost impossible. There was always a certain irony that the one part of the system which everyone needed to understand was probably the most complicated.
“Furthermore, the introduction of automatic enrolment meant means-testing had to go, otherwise savers nudged into a workplace pension would risk losing out on state benefits as a result.
“Shifting to a single-tier payment from April 2016 for future retirees – currently worth £168.60 a week and protected by the triple-lock – has the benefit of simplifying the system, although in reality it will take decades before the complexity of the old system has been fully removed.
“And given Jeremy Corbyn is already talking about making the state pension fairer for workers with ‘arduous’ jobs , there is a fair chance further political tinkering will be on the cards long before true simplification has been achieved.”
Accelerated increase in state pension age to 67
“While the single-tier state pension was generally hailed as a positive reform, increasing the age at which people receive their state pension was unsurprisingly decidedly less well received.
“As a result of changes introduced in the Pensions Act 2014, the state pension age will rise from 66 to 67 by 2028 – eight years earlier than under the previous plans.
“An estimated 8 million people will be affected, losing out on a year of state pension payments. Based on the single-tier amount that’s £168.60 a week or £8,767.20 of income this cohort of 1960s born retirees will need to find from elsewhere.
“The measure is expected to save the Treasury over £70 billion in total, with a further £11 billion gain coming through extra income tax and National Insurance payments resulting from people working longer.
“Given the eye-watering scale of these sums, the reaction has been relatively muted – a real stealth money-raising move as far as the Chancellor is concerned. And if average life expectancy continues to rise into the future we could well see the state pension age pushed to 70 and even beyond, pushing greater responsibility for retirement saving onto individuals.”
Clampdown on high workplace pension charges
“Away from the state pension, the Pensions Act 2014 also brought a new focus on charges in response to a damning report on workplace pensions published by the Office of Fair Trading in 2013.
“A cap of 0.75% was eventually introduced in April 2015, covering default investments in automatic enrolment qualifying schemes.
“The impact of the charge cap is hard to quantify, although Government figures at the time suggested a drop in fees from 1.5% to 0.75% could save someone £100,000 over their working life.
“It was particularly important that a charge cap was in place for automatic enrolment given its reliance on inertia and the fact schemes are chosen by the employer rather than the individual member.”
