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