As a turbulent 2020 comes to a close, we are all left wondering what 2021 will hold. This is just as true for our pension pots as it is for any other part of life.
Pensions have become political, and there is a chance that 2021 could see the government raid retirement pots in some form to pay the country’s bill for tackling the coronavirus outbreak.
A wealth tax and pensions tax relief changes are not a given, but there is a growing feeling that they might catch the chancellor’s eye as ways of generating much-needed revenue to pay for the pandemic. If you think you could be affected by either, it’s worth keeping an eye on announcements or proposed consultations so that you can be ahead of the game.
Here are some possible changes to keep an eye on next year:
- The possible introduction of a wealth tax that could include the value of pensions, both defined contribution and defined benefit schemes.
- A possible dampening down of pension tax relief for higher-rate and additional rate taxpayers, together with a rise in tax relief offered to basic-rate taxpayers on their pension contributions, to bring the two more into line and generate some revenue for the government.
Scams and auto-enrolment
- The Pension Schemes Bill is set to receive Royal Assent. The main principles of the Bill are to increase regulatory powers to protect people from pensions scams, to act on climate change through pension investments, and to enable the long-awaited pensions dashboard.
- The DWP is likely to publish further updates on its consultation on how to make annual benefits statements for workplace pensions simpler to understand.
- We can expect the Pensions Regulator to provide an update on its work to tackle scams.
- There is a chance the government could look to reduce the minimum age for auto-enrolment.
- The government could explore the ability to access pension benefits earlier for those who are out of work and unable to work in the run-up to state pension age.
- The government could choose to make National Insurance contributions payable by people past state pension age who choose to continue working.
The climate risk of your pension may not be keeping you awake at night, but exposure to climate risks is now considered a financial risk that could impact long-term returns, which is one reason it has moved up the government’s pension policy agenda.
There are other pension policy areas that could help protect more people from poverty in retirement that the government could look to introduce, so we could expect further consultations on some of these measures, too.
Your pension priorities in 2021
- Find out where your old workplace pots are – and how much is in them.
- Check the charges on your old pensions and if quoted as percentages, calculate them in pounds and pence terms – you could be paying much more than necessary, particularly on larger pot sizes.
- Increase your contributions by just 1%. If you haven’t already increased your contributions beyond the auto-enrolment minimum, it’s a good idea to do so, as for most of us, 8% of salary will not be enough to generate a big enough pot when you retire.
The minimum is not a guideline. Aim for something closer to 10 to 15% of salary (yes, it does sound high) and you’ll be in the right ballpark. If you’ve got your emergency savings covered, don’t forget, a pension is one of the best investments you can make, as you get ‘free’ money, in the form of tax relief from the government and also contributions from your employer.
- Check the risk level of your pension is right for your life stage. Research from interactive investor uncovered that almost a quarter of 18 to 34-year olds are in low risk pensions. Younger people, who have longer to invest until they retire, are in a good position to take more rather than less risk. Too little risk is as problematic as too much. Some older workers may also be in pensions that are too low risk, particularly if they are not planning on accessing their whole pot in one go, but using drawdown instead.
- Check whether your pension is invested in line with your values. While most workplace schemes offer an ethical or sustainable option, it’s worth checking the holdings. Most people don’t know where their money is invested. Often, pensions invest in companies we might not like, such as tobacco or fossil fuels companies. This is changing for the better, but the investments in your own fund are worth keeping an eye on.
- If you are approaching retirement, consider how long your current pot is likely to last based on the annual income you want to take from it. You can then plan your contributions accordingly.
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