Policy papers

Royal London Policy Papers

In our policy papers, we have our say on news and issues that could impact our customers.

Finding the right medicine – how to fix the problems between doctors and their pension scheme

Contributions into pensions generally attract tax relief. This means that the money that goes into the pension is not taxed at the time it is earned. Instead, tax is paid when the pension is drawn out and usually a part of the pension pot can be withdrawn tax free.

Those who exceed the Annual Allowance face a tax charge at their marginal income tax rate on any accruals above their Annual Allowance. Those who exceed the Lifetime Allowance pay tax on any excess at a rate of 55% where the money is taken as a lump sum and at 25% where the money is taken as a regular pension income.

Throughout this paper we focus on the impact of pension tax relief limits on members of the NHS pension scheme. This is because it appears to be the case that those limits bite in particularly unsatisfactory ways on senior NHS staff.

This paper aims to identify two main approaches to potential solutions.

Download 'Finding the right medicine – how to fix the problems between doctors and their pension scheme' now.

Group Personal Pension or Master Trust? – A guide for employers

Since automatic enrolment began in 2012, millions of workers have been enrolled into GPPs and millions into MasterTrusts, and some employers will never before have had to think about the differences between the two arrangements.

The purpose of this short paper is to set out the main differences between GPPs and MasterTrusts and to identify a series of issues which employers may wish to consider when deciding between the two approaches.

We believe that there are high quality pension arrangements of both types and our aim is to provide factual information for employers to help them to decide what is the right arrangement for them and for their employees.

Download 'Group Personal Pension or Master Trust? – A guide for employers' now.

One of the most dramatic trends in the UK Labour market in recent years has been the growth in the number of people working past traditional retirement ages. As you'll see in this paper, the number of people aged 65 in employment or self-employment has more than trebled since the turn of the century.

In the first part of this paper we use the Labour Force Survey to find out a bit more about the people who are working on past age 65. Next we combine this information with data from the Family Resources Survey to look at how far those in work past 65 are also drawing a state pension. Finally we look at the personal finance implications of combining a state pension with earnings compared with deferring taking a state pension.

Download 'Are hundreds of thousands of people making a mistake by drawing their state pension too soon?' now.

Since 2006, as part of pensions ‘simplification’, there has been a limit on the amount of pension saving which an individual can undertake over their lifetime with the benefit of pension tax relief. This is known as the Lifetime Allowance or LTA.

The way in which pensions are tested against the LTA depends on the concept of a ‘Benefit Crystallisation Event’ (BCE). This is one of a list of points in time at which pension rights are valued and a percentage of the prevailing LTA is used up. This can be a highly complex process, especially where individuals have multiple sources and types of pension wealth.

What is not known however is how many of today’s working age population are likely to face LTA issues over the course of their working life.

The purpose of this paper is to fill this gap in our knowledge.

Download 'The Lifetime Allowance ‘timebomb’ – why more than a million workers need to know what it is and what to do about it' now.

Partly as a result of rising house prices and rising rents, young people are buying their first home later in life. Later, more often than not, than the age at which they have their first child.

Consequently, for the first time in living memory, babies are as likely to be born into rented accommodation as a home owned by their parents.

This policy paper will outline the scale of the problem, as well as suggest some likely causes and consequences of the ‘parent rent trap’ among Britain’s young families.

Download 'The parent rent trap – how more parents are bringing up children without long-term housing security' now

Since 2012, the UK has seen a transformation in the world of workplace pensions. More than one million employers have enrolled around ten million employees into a workplace pension with a legal duty on the employer to choose a scheme and to make a contribution.  The purpose of this paper is to examine what is likely to happen in April 2019 when the final step-up in mandatory contributions takes place.

We do this in two ways; we review the available evidence from official sources and from pension providers into what happened in April 2018 when the first contribution increase took place and we look at what is likely to happen to disposable incomes in April 2019 when contribution rates rise, taking account of wage growth and changes to the income tax and National Insurance systems which will happen at the same time.

Download 'What will be the impact of the April 2019 step-up in automatic enrolment contribution rates?' now

Since 1st October 2018, financial advisers have had to present information about pension transfers to their clients in a new way. In this joint paper between Royal London and Lane, Clark and Peacock, we examine what information clients will see about the value of their pension transfer, and consider what impact this could have on the transfer market.

Download 'What will the FCA’s new rules mean for DB to DC transfers?' now

Pensions are a long-term business and the constant tinkering with limits and rules around pension contributions is unhelpful. We think that there is a high likelihood that the 2018 Budget will make major changes to pension tax relief, cutting the overall level of relief and making the system still more complex. In this paper we begin by setting out some of the reasons why the Chancellor is likely to find the temptation to tinker with tax relief irresistible. We then look at the various aspects of the pension tax relief regime, explaining how each works, what has happened in recent years and what the Chancellor might change.

Download 'Pension Tax Relief: Where will the chancellor's budget axe fall?' now.

Defined Benefit pension entitlements are made up of multiple components, built up during different periods of service and subject to different rules. This complexity adds to the cost of running pensions and makes it hard for members to understand what they have got. This paper explores the potential for a radical standardisation and simplification of pensions and considers the advantages of such an approach and the barriers that would have to be overcome.

Download 'Simplifying Pension Benefits – is it time for the Pensions Pound?'

Pension fund trustees face some tricky decisions about how best to respond to the growing demand for DB to DC pension transfers. Should they engage fully, perhaps signposting or even funding financial advice? Or should they stay out of the whole process as far as possible, restricting themselves to the bare minimum legal level of communication. In this paper, pensions lawyers Eversheds Sutherland and mutual insurer Royal London join forces to help trustees navigate these dilemmas.

Download "What shall we tell them? – Royal London and Eversheds Sutherland offer guidance for pension trustees on transfers".

Recent debates around investment strategies have suggested that ‘active’ investment often delivers poor value for money and that ‘passively’ tracking stock markets provides a better return. In this paper we look at where passive investing is indeed likely to be the best strategy, but warn of the dangers if too great a share of investment funds end up being invested passively. We also identify areas where active investing can add value

Download 'Could the passive investing pendulum swing too far?'

On the face of it, record levels of home ownership among the retired population ought to provide a substantial measure of insulation against future declines in pensioner incomes. If people can access their housing wealth in an affordable way which allows them to top up their regular income then we might hope that this will give us more time to get pension saving levels up to more realistic levels. However, our analysis suggests that for most households, housing wealth is unlikely to be a ‘get-out-of-jail’ free card.

Download 'Will housing wealth solve the pensions crisis?' now.

In a world where millions of people reached retirement with a guaranteed final salary pension or routinely used their pension pot to buy an annuity, the issue of how to manage your investments through retirement was of interest only to the relatively wealthy. But in a world where millions of people are now being enrolled into Defined Contribution (DC) pensions and where those reaching retirement have much more freedom on what to do with their pension pot, people will need much more help and support in deciding how best to manage that pot, to give them a decent standard of living through retirement. In this paper we explain why attempting to generate high levels of natural income in your retirement pot could have seriously damaging consequences and set out an alternative approach, which is more appropriate in the current environment.

Download 'Don’t chase risky income in retirement' now.

One of the most frequently asked questions in the world of pensions is ‘how much do I need to put into my pension?’. The answer obviously depends on things like how old you are, how much you earn, when you plan to stop work and what standard of living you want in retirement. In this paper we look at the size of the pension pot that might be needed to enjoy in retirement the same sort of standard of living that you enjoyed when you were of working age, and we track over time how the pension pot target or ‘pension mountain’ has changed in size.

Download 'Will we ever summit the pensions mountain?' now.

The first phase of automatic enrolment has been a huge success. However, this is only the beginning. Automatic enrolment has been phased in exceptionally slowly, both in terms of the gradual roll-on of firms, from largest to smallest, and also in terms of the required contribution rates.

This paper argues that April 2018 and April 2019 will not see a rush to opt out of workplace pensions. Despite the fact that household budgets are stretched, with real wages having seen little increase in the last decade, we believe that a number of factors will combine to keep pension scheme membership at a high level.

Download 'Will Britain take the April pension contribution increase in its stride?' now.

With the over 85s being the fastest growing section of the population, resolving the issue of funding of long-term care is becoming ever more urgent. Yet despite more than twenty years of Royal Commissions and expert reviews, we seem to be no nearer to a solution. A Green Paper is expected in the coming months which will undoubtedly summarise the nature of the problem and ask some searching questions, but the recent General Election campaign suggests that there is little prospect of political consensus on a way forward.

The purpose of this paper to suggest that a new financial product – the care pension – could be part of the solution.

Download 'Is it time for the "Care Pension"?' now.

The pension freedoms introduced in 2015 changed the way we take income in retirement. No longer having to buy an annuity has increased flexibility enormously but people are now responsible for working out how best to make their pension last so they don’t run out of money in retirement. That means deciding how much money to take out each year and it means setting an appropriate investment strategy. It goes without saying that your income won’t last as long if you take a lot of money out of the pension pot early on. But what should you invest in?

This paper considers two hidden dangers in deciding the best investment strategy to sustain an income in retirement. Are you taking enough risk to generate the growth you will need to sustain income for a long time? Are you taking the right kind of risk to avoid nasty surprises that could force you to reduce the income you are taking?

Download 'Avoiding hidden dangers in retirement' now.

There is a general assumption that once employers have met their initial duties by enrolling eligible jobholders into a compliant scheme, re-enrolling those who had opted out every three years, and enrolling new workers as and when they start work, this is largely ‘job done’. This policy paper asks the question as to whether employers can simply sit back at this point and congratulate themselves on a job well done, or whether there are ongoing issues of which employers should be aware?

Download "Automatic enrolment and the law – how far do employers’ duties extend?" here.

Millions of workers have salary-related pension rights, often built up in a previous job. What they may not realise is that they have flexibility about how they take their benefits. This could include taking a reduced pension early, an enhanced pension later or choosing a higher starting pension in exchange for giving up some inflation protection. They could also choose to transfer some or all of their pension rights out into another scheme. But many members do not know about these options. This policy paper looks at current practice and makes recommendations for schemes, advisers, regulators and government.

Download 'Helping Defined Benefit members make better retirement choices' here.

Recent figures from the Office for National Statistics on the ‘savings ratio’, suggest that British households have stopped saving in large numbers. This new policy paper looks ‘under the bonnet’ of the official statistics and concludes that there is a danger that commentators and policy makers may be drawing the wrong conclusion from these figures.

Download 'Has Britain really stopped saving?' here.

Recent decades have seen a profound change in the way we live our lives. One of the biggest changes has been the fall in the proportion of people living as part of a married couple and the rise in the proportion choosing to cohabit outside marriage.

Download 'Could living together in later life seriously damage your wealth?' here.

The new government faces two key challenges on pension policy:

  • To support existing pensioners in a fair and sustainable way;
  • To ensure that today’s workers, both employed and self-employed, build up a decent pension to complement the state pension they will receive in retirement

In this ‘manifesto’ we set out three key areas where the new government needs to take action and make recommendations for reform.

Download 'A three point manifesto for pensions' here.

Housing wealth in the UK is becoming increasingly concentrated amongst older generations. Home ownership rates amongst the under 45s have been falling steadily, whilst older homeowners have benefited from high levels of house price inflation. But what will happen to that housing wealth in the future and which generation will ultimately benefit?

Download 'Will harassed Baby Boomers rescue Generation Rent?' here.

Automatic enrolment into workplace pensions has been one of the biggest good news stories in pensions for many years. As at 31st December 2016, nearly 7.2 million workers had been automatically enrolled into a workplace pension, with more than four in five choosing to remain in a pension rather than exercising their right to opt out. This is a hugely encouraging reversal of the long-term decline in pension scheme membership in the private sector.

Download ‘The Mirage of Flexible Retirement’ here.

The desire to hold wealth in the form of cash – such as bank accounts or Cash ISAs (Individual Savings Accounts) – is entirely understandable. Ready cash provides a buffer against unexpected expenditures, and at a time of market turbulence, holding wealth in cash can provide a measure of stability.

But when cash holdings turn from a short term buffer to a long term investment, the alarm bells should start ringing. Interest rates on cash deposits slumped to record low levels after the financial crisis and fell again after the UK’s vote to leave the EU. As a result, when viewed over a ten year period, cash has not even achieved the very basic objective of keeping pace with inflation. By contrast, money invested across a wide range of asset classes – multi asset investment – has beaten inflation and outperformed cash by a wide margin.

£1000 put into a deposit account 10 years ago would be worth less than £900 in today’s money. £1000 put into a simple multi asset fund would have been worth more than £1500 in today’s money.

Download ‘The Curse of Long Term Cash’ here.

New analysis by Royal London has found that new mothers may have lost out on more than half a billion pounds in state pension rights in the last three years because of changes to the rules around Child Benefit. We are calling on HMRC to take action to deal with this problem before a whole generation of women reach pension age with incomplete pension records.

Download The Mothers Missing out on Millions here.

In recent years, the HMRC’s limits on pensions tax relief have been repeatedly reduced. The Lifetime Allowance (LTA) is the maximum amount of tax relieved pension saving that an individual can build up over their lifetime. This has fallen from a peak of £1.8m in 2011/12 to £1m in 2016/17. The Annual Allowance for contributions into tax privileged pension saving was cut from a peak of £255,000 in 2010/11 to £40,000 in 2014/15. This was followed in 2016/17 by the introduction of a complex tapering system, with a reduction from £40,000 per year to £10,000 per year for the highest earners.

In addition to the fall in the value of these HMRC limits, annuity rates have fallen sharply, particularly since the financial crash of 2008, and again following the referendum on the UK’s membership of the European Union. This means that the value of a pension that can be purchased by someone who stays within the HMRC limits has fallen sharply in the last decade, particularly when account is taken of inflation.

Download Time to end the 'Salami slicing' of pensions tax relief here. 

The number of people in paid work living in rented accommodation has risen sharply in recent years. In 2013/14 there were around 7.7 million working adults living in rented accommodation compared with around 4 million a decade earlier, a rise of over 90%.

Many of these renters may assume that if they were to lose their income because of unemployment or sickness their rent would be covered by the State. But for millions of renters this would be a mistaken assumption. In the event of loss of earnings, large numbers of renters would find either that they were not eligible for housing benefit or that the amount payable would only cover part of their rent. If loss of earnings continued for a sustained period these renters could find themselves unable to pay their rent and could be forced to move out. The research contained in this report suggests that the number of such ‘renters at risk’ is large and has risen substantially in recent years.

Download the 'Renters at Risk' here.

A small but growing number of people report that they are planning to fund their retirement not through saving in a pension but through investing in their own home. Their plan is to downsize to a smaller home at retirement, freeing up a large cash sum to sustain them in their later life. But this report shows how this ‘downsizing dream’ could easily turn into a nightmare.

In Part 1 we show why changes in family life, the mortgage market and the jobs market may mean that the assumptions behind the downsizing dream may be unrealistic.

In Part 2, we look at how much equity would be released by trading down at retirement and how much income this could generate. For the UK as a whole, we find that even if someone traded down at retirement from an average detached house to an average semi-detached house, the equity released – combined with the state pension - would generate an income of barely half of pre-retirement wages. In all parts of the UK outside London the typical downsizer would be left with a standard of living well below their pre-retirement quality of life.

In Part 3, we consider other barriers to the ‘downsizing dream’ including the lack of suitable property for downsizing and the psychological barriers to moving out of your cherished family home just at the point where you are going to be spending more time in it.

Download the 'Downsizing Delusion' here.

Citizens of Australia, Sweden, the Netherlands and several other countries can do something that British citizens cannot – they can go to a single website and see all, or most, of their pension rights in one place. This can help them to plan better for their retirement, to move their money to the best value pension schemes and track down lost pensions. Whilst there has been much talk in the UK about the need for a Pensions Dashboard, the current timetable to have something in place by 2019 looks very unambitious.

This paper first provides a taster of what is done in other countries.

The second part of this paper summarises the UK debate to date. It highlights the fact that whilst ideas for dashboards have been around for years, very little progress has so far been made despite the best endeavours of various players. It calls for government and regulators to move from their passive stance to date. Instead, they need to actively drive forward the process, making sure that the consumer interest is front and centre and that all holders of pension data play their part in providing the information that scheme members want and need.

Download 'Pension Dashboards around the World' here.

Automatic enrolment will give around ten million employees the opportunity to join a workplace pension, benefiting from tax relief on contributions and an employer contribution. Whilst the amounts going in to such pensions are typically relatively low, the policy will at least lead to much higher levels of pension scheme membership amongst employees, reversing a decades-long decline.

Britain’s 4.6 million strong ‘army’ of self-employed people are generally not included in automatic enrolment and have therefore not been part of this huge growth in pension scheme coverage. In fact, coverage amongst the self-employed has plummeted in recent decades and is now at crisis levels. For example, the limited data available suggests that in the mid 1990s around 62% of self-employed men were members of a pension scheme, but by 2012 this proportion had fallen to less than one quarter.

Download Britain's "Forgotten Army" here.

On 16th March the Chancellor faces one of the most difficult judgment calls of his time in office. Following a summer 2015 Green Paper, he will now have to decide whether to go for major reform of the system of pension tax relief, minor tweaking or simply leaving the system alone. His decision will affect millions of workers and firms, future generations, the financial services industry and the wider macro-economy.

This paper outlines the very wide range of factors which the Chancellor will be considering. As well as the desire to raise revenue he must think about the impact of any reform on the incentives to save both by individuals and firms. He will need to find ways of simplifying a hideously complex system and of making sure that the system genuinely does incentivise people to save for the long-term. And any reform must stand the test of time and put an end to the constant tinkering that we have seen in recent years.

Download 'Pensions Tax Relief: Radical reform or daylight robbery?' here.