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Fiona Tait: The fallacy of pension freedom and choice

The people who govern us persist in wrongly thinking of retirement as a one-off process

Freedom and choice are highly desirable. People have fought for generations for the ability to do and say what they wish without fear of reprisals. Google the phrase today, however, and the first page of entries is all about pensions.

Of course, this does not mean people have total freedom to save as much as they want via pensions and take their money out when they want. It means they have the freedom to take their benefits as they wish when they are old enough. Or does it?

I gave this some thought after a report from Canada Life, which found that 22 per cent of people who had taken benefits from their pension plan were unaware of the money purchase annual allowance.

This is not surprising. Given the largely justifiable pressure on people to save as much as they can for retirement, why would they imagine they would be penalised for doing so when they have just taken out more than a quarter of their fund? If anything, it makes sense to save more than they were before to compensate from the amount withdrawn.

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One reason is, of course, tax relief. I have heard the argument that the MPAA is intended to prevent people recycling money and receiving double tax relief, but they do not. Any amount taken above the pensions commencement lump sum is taxed as income on the way out, possibly at a higher rate than the relief they got when it went in.

Arguably, therefore, making further contributions from this income should qualify for tax relief in the same way as money from any other source. That is unless someone were looking for a way to justify reducing tax relief for other reasons.

The MPAA also kicks in at exactly the point when people are potentially most able to save. We know the majority of people accessing their funds for the first time are now in their late 50s or early 60s. Many of these individuals are not looking to retire, but simply want a one-off amount to pay off debts or fund a specific purchase.

Not only are they still working but they may be in the process of getting rid of the huge financial drain commonly known as children. This is the time when saving could potentially become more affordable and indeed more desirable as the concept of retirement starts to become much more personal.

It would be particularly true if they were lucky enough to have gone through a “retirement MOT”, which would highlight shortfalls in their future income.

A second problem is that the people who govern us persist in thinking of retirement as a one-off process. For more and more people, this is no longer the case. Rather than working nine to five one day and not working at all the next, many prefer to do it in a series of stages as they get older and are less willing or able to put in the hours that they used to.

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For the fortunate few, this decision may be driven by job satisfaction and/or social factors, but for others it is driven by finances and the realisation that they do need to keep working and saving if they are to have enough money to support themselves later on.

This mindset also means there is a lot of pressure piled on to the initial decision to access benefits. Regulation requires that, when this happens, it is necessary to consider all the options available and, in effect, compare them with an annuity.

At age 55 or even 60, an annuity is highly unlikely to be the best option, unless the individual is in pretty bad health.

Annuities were never intended to pay income over the 30- to 35-year period that increases in life expectancy make possible.

Surely it would be better to buy an annuity when it becomes more suitable rather than making it a life or death decision at the outset?

If we had a mindset that considered retirement in at least two stages – the first when money is first accessed and the second when income needs to be secured, either because there are no more earnings, or the individual has become more risk averse – it might mean that annuities would go back to where they belong – at the end stage of retirement.

Obviously, these two stages could occur at the same time but, for those for whom it does not, the initial decision is about how much they can afford to withdraw, including ongoing savings, rather than whether they want an annuity or not. If there were no MPAA, they would also have the freedom to rebuild the reduced fund.

Fiona Tait is technical director at Intelligent Pensions

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. I can never understand why someone would access their pension and then wish to continue contributing. It is contrary to all logic.
    In case Fiona is unaware it is definitely verboten to take PCLS and reinvest into a pension – it’s called recycling. That is perhaps one of the reasons for the limitations. How they can identify recycling is another matter entirely – unless you are daft enough to reinvest immediately.

    • But if you’re still earning as you continue to make contributions to an RPS, how might it be established that you’re recycling your PCLS? Against the rules it may be but preventable it isn’t.

      Tax relieved contributions, tax free growth, a tax free lump sum on vesting and then you can get tax relief by ploughing back in your PCLS. How can you “never understand why someone would access their pension and then wish to continue contributing”? To me, it looks very readily understandable.

      A better way to tackle PCLS recycling would be for HMRC to declare that no PCLS shall be allowed in respect of all and any benefits accruing from any contributions subsequent to the first drawing thereof.

  2. PS. But I do agree with the headline. Pension Freedoms are a fallacy. The only freedoms, as I so often repeat, are the freedom of advisers, fund managers, providers and platforms to make money and the freedom of the Revenue to collect windfalls. The client is also free – so see his/her retirement income melt away.

  3. It all boils down to one fundamental point.

    The government and politicians of all stripes these days seem to believe that they are entitled to take more and more of people’s hard earned income and savings to justify their inability to truly get a grip on public spending and the massive inefficiencies within the public sector.

    But likewise they want to seem “generous”, so it’s a game of smoke and mirrors.

    The only thing that amazes me, is the number of people that buy into the concept that they are responsible for funding other people’s lifestyle choices…

    I guess it is a funny old world.

  4. I wonder in reality how many people who have taken their maximum PCLS and dipped into their residual pension fund, would be negatively impacted by being restricted to paying no more than £333.33 a month into a UK registered pension scheme.

    They would still be able to pay 20K each tax year into an ISA.

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