As we start the beginning of a new year, we’re reflecting on changes in the pensions industry - past, present, and future. The past decade has brought significant changes to British pensions. We’ve seen initiatives like:
- Auto-Enrolment;
- advancements in technology; and
- more flexible regulations.
This has made it easier for individuals to manage and use their retirement savings. Recent changes announced by the Chancellor in the Autumn Budget raised an important question: what further changes could we expect in the coming years?
The past 10 years of pensions
Let’s take a closer look at five key changes in the pensions industry over the last decade.
1. Introduction of Auto-Enrolment
PensionBee’s Founder and CEO, Romi Savova says: “I think Auto-Enrolment has put a new generation on a better footing for the future. Especially if you’re in your early 20s and you’re auto enrolled. If you’re saving throughout your life, come the age of 65, you’re probably going to be doing quite all right. I do think that’s been absolutely transformational.”
Auto-Enrolment is a system where eligible employees are automatically enrolled in a pension scheme by their employer, unless they choose to opt out. This initiative has made it easier for individuals to save for retirement.
In April 2019, the minimum contribution rate increased to 8%. Of which 5% comes from employees’ salaries (including tax relief) and 3% from employers. This change has encouraged more people to participate in pension schemes, helping to boost their financial futures.
2. Pension freedoms reforms
The introduction of the ‘pension freedoms‘ in 2015 made a big difference in retirement planning. Savers aged 55 and over (rising to 57 from 2028) have more choice on how to take an income from their defined contribution pension. Under these reforms, eligible retirees have the freedom to withdraw an income from their defined contribution pension, accessing as much as they want.
The tax rates on these withdrawals will depend on their total income for the year. Up to 25% of the pension pot can be taken tax-free. Currently beneficiaries can access that money without having to pay Inheritance Tax (IHT) if you pay away before 75.
Although this is set to change - more on IHT and pensions later! This has empowered individuals to manage their pensions according to their needs, although it has also highlighted the importance of understanding retirement costs.
3. The State Pension criteria
Money Advice Editor at The Telegraph, Sam Brodbeck says: “To date, pensioners have largely had final salary pensions and the State Pension. There’s probably going to be a generation, perhaps Gen X, that has none of that. And actually retires quite poor with only the State Pension.”
The introduction of the new flat-rate State Pension in 2016 marked a significant shift in eligibility requirements. To qualify for the new State Pension, individuals must have at least 10 years of National Insurance (NI) contributions, with 35 years needed for the full amount.
In December 2018, the State Pension age for women increased to 65. By October 2020, it rose to 66 for both men and women. These changes have prompted many to reconsider their retirement plans and the timing of their State Pension claims.
4. The triple lock promise
The triple lock system, designed to ensure that the State Pension keeps pace with inflation, was suspended in 2021. This system guaranteed that the State Pension would increase based on the highest of:
- average earnings;
- inflation; or
- 2.5%.
Due to the impact of the furlough scheme, average earnings rose significantly, which may have distorted figures artificially.
This prompted the government to pause the earnings element of the triple lock for the 2022/23 tax year. Instead of increasing based on earnings, the State Pension rose by 3.1% in line with the Consumer Prices Index (CPI). But it was reinstated in April 2022 to support pensioners facing rising living costs amid ongoing economic challenges.
5. Abolition of Lifetime Allowance
In April 2023, the Lifetime Allowance (LTA) tax charges on funds exceeding the limit were removed. This allowed individuals to save more without facing penalties. The LTA itself was only abolished in April 2024, when it was replaced by two new allowances:
- the Lump Sum Allowance (LSA); and
- the Lump Sum and Death Benefit Allowance (LSDBA).
This significant change was part of the previous government’s Budget announcements in 2023 aimed at encouraging higher pension savings.
Additionally, the annual allowance for pension contributions increased from £40,000 to £60,000 (2023/24). This further incentivises individuals to boost their retirement savings. This increase remains in effect for the 2024/25 tax year as well. This move was expected to benefit many savers, providing them with greater flexibility in their pension planning.
What could the next 10 years look like?
Looking ahead, here are five proposed or potential changes we might see in the pensions industry over the next decade.
1. Inheritance Tax on defined contribution pensions
For a long time, it’s been possible to pass on pension funds to beneficiaries without them incurring Inheritance Tax (IHT). This has led many individuals to draw down on other assets as they age, allowing them to leave their pensions intact.
Under current rules, if someone passes away before age 75, their unused pension funds can be paid to beneficiaries tax-free. If they die after 75, their beneficiaries still don’t pay IHT, but they’re liable for income tax at their marginal rate on any withdrawals.
From April 2027, unused pension funds and death benefits will be included in IHT calculations. This could increase the tax burden on estates with large pension funds. It’s worth mentioning that the details of this change are still under consultation and the specifics of this new policy are currently unknown.
2. Rising pension age
Founder of Money to the Masses, Damien Fahy says: “I think the rules around pensions are changed too frequently. It’s a game they’re playing, but the rules are always changing. The age at which you can access your pension would’ve changed since you first put money in. I think we need to have a period of calm around pensions.”
The number of centenarians (people reaching 100 years old) has more than doubled in the past 20 years, according to the Office for National Statistics (ONS). The State Pension age is currently 66 but will rise to 67 starting 6 May 2026. Future changes will depend on population size and life expectancy.
The normal minimum pension age is the earliest point at which individuals can access their personal or workplace pensions without facing hefty tax penalties. From 6 April 2028, this age is set to rise from 55 to 57 years old.
3. The arrival of the Pensions Dashboard
Back in 2002, the Secretary of State for Work and Pensions suggested a web-based retirement planning tool. Fast forward over two decades and this still hasn’t been implemented. In September 2016, the government first announced its plans to deliver pension dashboards. The suggested Pensions Dashboard would allow savers to view their combined pensions information online, helping to reconnect lost pension pots.
This is more important than ever. New analysis conducted by the Centre for Economics and Business Research revealed that nearly one-in-five (19%) UK adults feel certain they have lost a pension pot. This equates to approximately 8.8 million individuals.
As such, there’s a critical need for timely implementation of the Pensions Dashboard to help millions of savers manage their pensions effectively. However, in October 2024, the Pensions Minister announced a prioritisation of the MoneyHelper Pensions Dashboard launch. This is a government backed and non-commercial digital service to enable people to access their pension information in a single place online.
In contrast, the Pensions Dashboard is specifically designed to enable commercial organisations to give users a detailed view of their pension savings. The launch of the Pensions Dashboard is currently delayed, which will affect how soon savers can access important information about their pensions. This delay means that consumers will have fewer options until the launch of commercial pension dashboard services. Once these services become available, it’ll increase savers’ options and encourage greater involvement in managing their pensions.
4. A 10-day pension switch guarantee for consumers
PensionBee’s Founder and CEO, Romi Savova says: “A ‘Pension Switch Guarantee’ is the obvious reform that we’ve been asking for many years. [It works] the same way that if you want to move any other financial asset. You tell one company that you’re joining and another company that you’re leaving. They have 10 days to move the money from one place to another.”
PensionBee analysis of Origo’s latest Pension Transfer Index has uncovered a 17% increase in transfer times over the last three years. Despite slow transfer times being identified as a problem by the Financial Conduct Authority (FCA) back in 2015, the issue remains prevalent amongst a number of key players.
The ‘Pension Switch Guarantee‘ initiative is campaigning for all providers to use electronic transfers for defined contribution pensions. Not only is this quicker, but it’s much safer for customers as payments are tagged and traced. This way you’ll know where your money is at every step of the process.
5. Expansion of Auto-Enrolment
The government needs to decide on the future of minimum pension contributions, including potential increases. The Pensions (Extension of Automatic Enrolment) Act passed in 2023 aims to expand enrolment to younger workers aged 18 to 21. It also removes the £6,240 lower earnings limit for qualifying contributions.
This change would result in additional contributions, significantly impacting take-home pay for low earners. By making pensions more accessible to younger workers, the government can help foster a culture of saving for retirement from an early age. This could boost the financial security of future generations.
Summary
The pensions industry is evolving quickly to meet the needs of today’s savers. In the past decade, we’ve seen key changes like Auto-Enrolment and pension freedoms that have made saving for retirement simpler.
Recent announcements from the Autumn Budget indicate that the government is keen to make further improvements. Looking ahead, we’re set to see new rules such as:
- IHT on pensions;
- changes to what age you can access your savings; and
- the launch of the Pensions Dashboard to help people keep track of their savings.
Ideas like a 10-day pension switch guarantee and the expansion of Auto-Enrolment could also make pensions more accessible. As these changes unfold, it’s important for everyone to stay informed and engaged with your retirement plans.
To learn more, listen to episode 34 of The Pension Confident Podcast. You can also watch the episode on YouTube or read the transcript.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
