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Alistair Cunningham: Pensions should not be a Govt cash cow

Ed Miliband’s proposal to cap drawdown charges is the latest in a long line of tweaks to pensions policy proposed by MPs

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I recommend a change to pensions’ legislation: fiddling should be banned. I am in favour of the pension freedoms but read with great concern political parties of all persuasions are considering further amendments to the rules. Some of us may protest but generally we allow pensions to be a political tool.

While the new freedoms have likely decreased apathy with respect to pensions, there is a long way to go.

By my reckoning pensions have been tweaked 12 times over the last decade. Now we have flexibility in retirement, entrusting individuals to make smart choices. This legislation works in tandem with auto-enrolment requirements for firms, as individuals cannot be entrusted to make smart choices. Odd.

These plans are hobbled by short-term political motivation. Policy has foisted savings away from the state (auto-enrolment), while narrowing tax relief (annual allowances) and opening the gates of additional taxation (flexi access drawdown).

Labour leader Ed Miliband set out plans to cut both the annual pension tax reliefs and lifetime limits applied to long-term savings. This is a truly awful idea, not least due to the very small revenues that would be generated, but the message it sends as pensions being a political tool.

It is worth considering that a money purchase fund at the £1.25m lifetime allowance (and Labour is proposing a lower £1m limit) would only secure a guaranteed pension income on inflation linked terms, with a spouse’s pension, of around £30,000 at age 60. This would be a reasonable pension but, at a level only halfway through the basic rate tax band, does not feel “wealthy”.

To add further insult, MPs are not affected to the same extent. Their extremely generous pension scheme allows them to accrue their maximum benefit after 26 years of service, due to the phenomenally high 1/40ths potential accrual rate. Working in conjunction with the generous application of the 20 times multiple means the lifetime allowance permits more than double the pension without incurring tax penalties (£62,500).

I am not trying to make a party political statement, as I am incensed over the hypocrisy of politicians of all varieties. On one hand they complain about the “savings gap”, introducing compulsory pensions for the masses (the contradiction in allowing pension freedoms seems to have escaped many politicians). As a cynic I consider the change as foisting the responsibility of long-term retirement planning on the individual yet at the same time encouraging those who are not as financially astute to withdraw more than they should and increase their tax burden.

As financial planners, and among the most knowledgeable on pensions, we have a responsibility to make clients, peers, friends and family aware of these insidious strategies. It is well researched that human beings are poor at making decisions that are long term in nature and on which they have little expertise.

Pensions remain a cash cow for HM Treasury to dip into when revenues run low and many of those who are influential in society (civil servants, particularly MP and judiciary) are barely affected by any tinkering that takes place. Because pensions are so long-term in nature, and therefore abstract, we need to work hard to make people care when they are toyed with.

Alistair Cunningham is financial planning director at Wingate Financial Planning 

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Comments

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  1. I love how when Labour mention how much tax relief goes to higher tax payers they fail to mention the subsidy that tax payers give the public sector pensions which are impacted less by changes to annual and lifetime allowances.

  2. Stabilityplease 17th March 2015 at 10:41 am

    Agree – LTA/ AA/ Tax relief should remain untouched (LTA actually removed as a tax on investment performance….if on pensions, why not on ISA’s?)
    Don’t forget that an employer funded scheme effectively provides full tax relief at highest rate and EE NI saving; as you say 20x multiple is obscene and if tax relief restricted on personal contributions is an absolute travesty!

    Pensions (along with health/ armed forces and education) should be removed from political party control. There should be a 30 year rolling plan for all with no knee jerk changes (that are often useless and cost millions to implement). We could at last have some continuity to plan strategies without fear of the politics of envy creating total chaos!

  3. But surely Pension Freedoms and indeed annuity reversal is the biggest cash cow going! Accelerating the payment of income tax and breaching thresholds will be the norm and guidance will not prevent it.

  4. The problem is, we get the politicians we deserve. My experience is that (with a few ignoble exceptions) MPs are not ignorant of the damage that such meddling can do to perception of the value of pension saving. However, political expediency wins out. All we can hope is that over time, damaging changes by one government can be undone or at least mitigated by their successors.

    As for the public who have not saved enough, the sad truth is they will have to work for considerably longer than their parents did. They will benefit from technological improvements that make life in old age manageable for longer but many of the jobs that exist today will not in 30 years.

  5. Sadly having just seen the anouncement that the Chancellor is to propose a reduction in the LTA to £1M, then this is all wishful thinking.
    Politicians of all colours really just don`t care about the damage all this tinkering causes as they are virtually untouched by it all.
    I despair for the future of the younger generations (unless of course you are able to secure a nice public sector job).

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