Spotlight

A Northern perspective on pension reform

Oct 01, 2018
Both the Republic of Ireland and United Kingdom are driving pension reform, which is a good thing for their citizens.

BY CAROL MALCOLMSON

The recent publication of the Roadmap for Pensions Reform 2018-2023 in the Republic of Ireland from a Northern perspective is a very thought-provoking document. It sets out the ambition for pension provision in the Republic to cope with the three burning issues for any jurisdiction: an ageing population; the ratio of those in employment to those in retirement; and the inadequacy of basic State pension provision.

In the paper, the concept of automatic enrolment (AE) has been introduced. This is something we in Northern Ireland have been familiar with for a number of years. It is interesting that the paper sets out a desire to ultimately set contribution levels at 14% of salary, of which 6% is borne by the employer. Contrast that with UK regulations which state that, from April 2019, contribution levels will be 8% of “qualifying earnings” with the employer contributing 3%.

The desire to have 14% of salary directed to retirement provision is to be commended. We all know that contribution levels of 8% of qualifying earnings will not deliver a comfortable retirement income. However, higher employer pension contributions mean higher fixed costs for the business. Therefore, this has to be balanced against remaining competitive in the global marketplace.

The level of opt-outs in Northern Ireland has been much lower than anticipated. It will be interesting to see how next April’s increase changes the mind-set of employees. It will also be interesting to see if any UK political party has the intention to set contribution levels where they have a meaningful impact on retirement provision. This is not very high on the political radar at the moment, I suspect, but it is something that needs to be revisited in the near future. The Republic of Ireland roadmap also outlines proposals for the reform of drawdown options and this should be welcomed. Legislation introduced in 1972 needs to reflect lifestyles in the 2020s.

The introduction of the Taxation of Pensions Act 2014 in the UK swept away a set of very complex drawdown and death benefit restrictions applicable to money purchase schemes. This has resulted in greater public engagement in pensions. Prior to the Act, the concept of being able to access whatever a client wanted, whenever they wanted, from a pension pot was caught up in a complex set of rules and regulations.

On death, the ability to cascade wealth through the generations was restricted by a penal 55% tax charge on individuals drawing income from their pension pots. The introduction of flexi-access drawdown and inherited drawdown has fundamentally changed the pension landscape in retirement. Flexi-access drawdown allows clients to manage their affairs in a tax-efficient way without the incumbent problem of forced annuity purchase at a time when gilt yields are poor. It also presents opportunities for the profession, as tax consequences need to be managed.

The age at death currently determines the tax treatment – under 75 means no tax consequences and over 75 means that benefits are taxable at the beneficiaries marginal rate as follows:

Pre-April 2015

In the case of a 65-year old client with no spouse, a pension pot of £1 million, and drawing an income of £30,000 per annum incurs a tax charge on distribution to residual beneficiaries of £550,000.

Post-April 2015

In the case of a 65-year old client with no spouse, a pension pot of £1 million, and drawing an income of £30,000 per annum incurs a nil tax charge on distribution to residual beneficiaries. 

Inherited drawdown is possibly the most important positive change to UK pension legislation in the last 40 years. The tax treatment on death was a genuine disincentive for clients.

Pension reform in either jurisdiction has to be applauded. Going forward, we need to empower and encourage individuals to plan for retirement because it is a fact of life – we cannot stop the clock ticking. From my perspective, it is clear that the Republic of Ireland and UK are pushing ahead with pension reform, and it is clearly beneficial for those who are prepared to put some savings aside now for a more affordable retirement.

Carol Malcolmson is a Partner in BDO Northern Ireland’s Wealth Management department.