Broadstone, a financial services consultancy, has released its predictions for the pensions market in 2025. The firm focuses on possible developments, government reviews and areas that require reform.
David Brooks (Head of Policy, Broadstone) shared his insights on future pension adequacy and state pension considerations. He also discussed tax relief, frauds, and death benefit benefits.
In the coming year, the focus will be on the government’s review of pension systems. The goal is to determine if existing systems are meeting the needs of a majority. Discussions are likely to include the adequacy and impact of auto-enrolment as well as potential enhancements like short-term saving vehicles that complement pension savings. The triple lock on state pensions will remain in place until the next elections, but questions about sustainability and state pension age are likely to persist.
Another concern is scams in the pension industry. Calls for tighter regulations and better vetting procedures for new schemes are being made. The speculation about pension tax reforms is continuing, especially the possibility of a shift to a fixed-rate system that could benefit basic rate taxpayers.
Pension Adequacy under Scrutiny
The government will begin the second phase in 2025 of its pension review. This phase will focus on whether the current systems are able to meet the financial needs of the general public over the long term. Broadstone says the review should prioritize:
- Pensions are easy to understand and use.
- Cost-effectiveness and value tailored to the member’s needs.
- Collaboration between employers and workers is strengthened.
The focus will continue to be on defined contribution (DC) pension schemes, which are now the most dominant model in the private sector. The government is likely to examine whether contributions are adequate and evaluate the effectiveness of automatic enrollment. Also, side-car saving vehicles that allow people to save for both short-term and long-term needs along with pensions may be considered.
The Work and Pensions Committee’s investigation into pensioner financial hardship could also influence reforms to ensure retirement systems are designed to reduce financial hardships among older populations.
State Pension Stability and Age Review
It is expected that the triple lock system will remain in place for state pensions until the end of this current parliamentary session, providing stability to retirees. The Government Actuary’s Department, along with independent bodies, will be advising on any changes to the state pension age.
There are proposals to move the current state pension age increase to 68 years old by 2044-2046 to 2037-2039. To allow individuals affected to prepare, any adjustments would require at least a ten-year warning period.
Reform of Pension Tax Reductions is Still a Possibility
The topic of reforming pension tax relief will likely remain in the spotlight. Broadstone emphasizes the possibility of introducing a flat-rate system for tax relief, which would make pensions more rewarding to basic-rate taxpayers. This could be a way to address equity concerns, but it would also create complications for those with high incomes and those who are in Defined Benefits (DB) plans.
The impact on healthcare professionals, such as NHS staff, is likely to be significant, causing concern about retention of critical public services, at a moment when waiting lists have reached record levels. This could make reforms more politically sensitive.
Fighting Scams
Broadstone offers several solutions to this problem. These include:
- Accelerating implementation of rules for DB Transfer Schemes
- Introduce a Pension Scheme tax reference system with thorough screening of all new applications.
- Improve information sharing for monitoring existing schemes
- Reviewing the penalties that are currently applied to victims of unauthorised payment, where individuals are treated as if they were at fault regardless of their losses.
A greater regulatory oversight would help to protect savers against complex scam structures that are designed to rob them of their money.
Demands to exclude death benefits from inheritance tax
Broadstone recommends that the government reconsiders its approach towards inheritance tax reforms (IHT), particularly in regards to pension death benefits. David Brooks argues it would be unfair to include death benefits from Defined Benefits (DB) schemes or Death in Service provisions (DIS) in IHT calculations.
These benefits aren’t intended to accumulate wealth, but instead provide financial security for a family in the event that a breadwinner dies. Included in IHT reforms, they could have a disproportionate impact on individuals who depend on these funds to replace their lost income.
The pension policy year is going to be busy. Reforms in pension adequacy and state pension age as well as tax relief and scam prevention may have a wide-ranging impact on employees and organizations.
