Updates and changes to the UK pensions system
Automatic enrolment has now been phased in, with all eligible workers scheduled to have been enrolled by 1 February 2018.
Automatic enrolment made it compulsory for employers to automatically register their eligible workers into a pension scheme. The employer must also pay money into the scheme.
State pension updates
A new State Pension system, referred to as the Single Tier State Pension, came into effect on 6 April 2016. The new system provides a higher flat-rate pension; and only affects those who reach state pension age on or after 6 April 2016.
The New State Pension replaces the Basic State Pension and Additional State Pension system, to help make state pensions more streamlined, easier to understand, and to provide a more suitable basic income to pensioners.
An individual pensioner with a complete NI contribution record of 35 years or more is eligible to receive the full State Pension of £159.55 per week (2017).
Under previous legislation, the state pension age was scheduled to increase to age 67 between 2034 and 2036 and to age 68 between 2044 and 2046.
As part of the Pension Act 2014, though, the Government brought forward the rise to age 67 to take place between 2026 and 2028.
Workplace pension updates
From 6 April 2018, the minimum contributions for the workplace pension will increase.
From 6 April 2018 to 5 April 2019, the employer minimum contribution will rise from 1% to 2% and staff contribution from 1% to 3%.
Then, from 6 April 2019 onwards, the employer minimum contribution will rise to 3% and staff contribution to 5%.
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The State Pension system in the UK
The New State Pension
The New State Pension replaces the Basic State Pension and the Additional State Pension, and is for people reaching State Pension age on or after 6th April 2016.
Before April 2016, members of some pension schemes were able to contract out of the Additional State Pension and pay less National Insurance contributions.
The Additional State Pension
Under the New State Pension, further entitlements to the Additional State Pension have been abolished.
Schemes are no longer able to contract out, which means National Insurance contributions may increase for those who were contracted-out prior to April 2016.
For those still eligible, the Additional State Pension is an extra amount on top of the basic State Pension for men born before 6 April 1951 or women born before 6 April 1953.
This provides a pension income that is more closely related to employees’ earnings levels.
The Additional State Pension moves upwards in line with the Consumer Prices Index (CPI). The annual rise in CPI was 1% in September 2016, so the additional State Pension was raised alongside this in April 2017.
This meant the maximum amount of Additional State Pension increased from £165.60 (2016) to £167.26 (2017).
Pension Credit
Pension Credit now has two components:
Guarantee Credit, which is currently payable from age 63. The minimum age for receiving Guarantee Credit is increasing in line with increases in women’s state pension age, as introduced by the Pensions Act 1995.
This means the Guarantee Credit qualifying age is gradually increasing to 66 for men and women by October 2020.
Savings Credit. This is no longer available for people retiring after 6th April 2016, but is still paid to those already in receipt.
For a transitional period of five years, until April 2021, people who may have been eligible for Savings Credit under the old system will keep their support.
Occupational Pensions
The UK operates a voluntary occupational pension system.
Defined Benefit (DB) schemes have been losing popularity for several years in the UK, due to the risk they place on the employer. However, they are still being provided to public sector employees.
In 2016, 13% of DB schemes were open to new members and 35% were closed to future accrual.
Meanwhile, automatic enrolment into Defined Contribution (DC) schemes had resulted in 66% of all employees becoming active members of pension schemes by March 2016.
Many schemes are sponsored by single employers, although multi-employer schemes are becoming more popular in the private sector and there are a few industry-wide arrangements.
More detail on UK occupational and personal pension schemes is below:
1. Small self-administered pension funds
A small self-administered pension scheme is an employer-sponsored DC pension that gives the employer extra investment flexibility. They are often set up to offer retirement benefits to a small number of company directors or key staff.
They can be open to all employees and their family members, even if they don't work for the employer.
For pension funds, the appointment of an investment manager and a custodian is required. Investment managers have to be authorised under the Financial Services Act 1986 and formally appointed by the trustees.
2. Insurance schemes
Insured schemes are arrangements provided directly by insurance companies where the benefits provided are secured by one or more insurance policies or annuity contracts.
They are set up under trust and are legally treated in the same way as self-administered schemes (pension funds).
3. Personal Pension plans
Personal Pensions Plans are arrangements that an employee can establish individually with a pensions provider.
Group Personal Pensions are increasingly being provided by employers as occupational schemes because of their flexibility and cost-effectiveness.
The governing rules are the same as for Personal Pensions but are set up in a group arrangement. All Personal Pension Plans are DC in nature.
Employers can still contribute to a personal pension and their contributions are tax deductible in. The company also benefits from National Insurance contribution relief.
4. Stakeholder Pensions
Since automatic enrolment legislation was introduced, employers with five or more staff no longer have to choose a stakeholder pension scheme for them.
Instead, they must now enrol staff into a pension scheme that can be used for automatic enrolment.
The employer selects the provider and all Stakeholder schemes are on a DC basis.
5. Unfunded schemes
Unfunded and unapproved plans, financed on a pay-as-you-go basis from corporate funds, are also possible although these are rather uncommon.
The four main unfunded schemes are the Armed Forces Pension Scheme, the Principal Civil Service Pension Scheme, the NHS Pension Scheme and the Teachers' Pensions Scheme.
Tax treatment of private pensions
Contributions into a pension fund are exempt from tax, the accumulation of the fund is mainly exempt from tax and the majority of the proceeds are taxable.
From 2016/17, employee contributions up to the lower of 100% of earnings, or £40,000 (the Annual Allowance), can be offset against income tax.
In April 2016, the Government introduced a taper to this allowance. For every £2 over an individual’s adjusted income of £150,000 to £210,000, £1 is deducted from their Annual Allowance.
Additional sources:
The Organisation for Economic Co-operation and Development (OECD) -http://www.oecd.org
