It will brook no argument when I say the pension landscape has seen huge changes over the last 15 years. But if we consider these changes, layer upon layer, it seems obvious there is no particular route map being followed. Instead, we seem to be following a path in a particularly convoluted maze.
The pension simplification “change to end all changes” in 2006 is a perfect example. Initial blue sky thinking, scaled down even before it was introduced, and now largely blown out of the water, with the lifetime allowance almost halving from its £1.8m ceiling down to today’s £1m, and the annual allowance slashed to £40,000 from £225,000.
The pension freedom changes have followed a similar pattern. We started with the initial suggestion of wholescale freedom for all; it is your money, you can do what you want with it.
But it did not take long for some restrictions to appear. For example, those with safeguarded rights and all they entail need to take advice in most cases before transfer.
Now, I am not suggesting that is necessarily a bad thing but it seems incongruous that someone with a £1m defined contribution pot can cash it in at will with no advice, whereas the holder of a defined benefit scheme worth £35,000 needs their hand held.
“We seem to be following a path in a particularly convoluted maze.”
The recent Budget saw further tinkering, with the reduction in the money purchase annual allowance to £4,000 from 6 April. One of the key benefits of the pension freedoms was the ability to phase withdrawals to fit in with the increasingly flexible approach many people have to later life; taking sums to top up other income or as a bridging pension until state benefits kick-in.
Now the freedom to withdraw funds from age 55 needs to be accompanied by flashing warning lights, although, as many will cash in without advice, they may not be noticed until well past the stop sign.
Another inconsistency around the change to the MPAA was the retrospective element. Throughout the last 15 years, change that may adversely affect people with existing arrangements has been catered for through various protections. This helped many in 2006, as well as when the lifetime allowance fell in 2012, 2014 and 2016.
Yet people who flexibly accessed their benefits between 2015 and now find the “deal” allowing them to pay up to £10,000 a year in future has been swept away without a murmur.
Lifetime Isa: Future scandal?
April also sees the introduction of the Lifetime Isa, which seems to have arrived without due consideration for how it fits into the savings landscape. Is it an Isa? Is it a pension? Is it a future scandal?
The Lifetime Isa has the potential to damage one of the few pension success stories of the last decade. Automatic enrolment has encouraged millions of new savers, helping people build up pensions they would not have otherwise had. But most of these savers do not have bottomless sacks of spare cash. If they are attracted by the new shiny Lifetime Isa, some will opt out of their employer’s pension and lose that hugely valuable employer contribution.
Do not get me wrong, the Lifetime Isa is likely to help some people, for example, the self-employed and younger professionals wanting help to get on the housing ladder. So I am not saying it is intrinsically bad. But there is a clear overlap across many of our pension and savings policies.
The current creation and management of pensions and savings policy simply is not working. Having said that, I am not sure what the solution is. Some suggest it could be the formation of an independent body overseeing savings policy but it is so unlikely the Government will give up power of such a crucial part of the tax system that seems a non-starter.
Whatever happens, we need more consistency and less tinkering every Budget. Perhaps the time has come for the Government to establish an ongoing pension commission. Not to take over but to provide input, expertise and, most importantly, greater longer-term thinking.
Andrew Tully is pensions technical director at Retirement Advantage