“For God’s sake, Gregg, when will they stop tinkering?” So went a recent conversation with an adviser friend. We had begun on drawdown strategies and sustainable withdrawal rates (is 4 per cent too high?) but the televison screen in the corner had caught my friend’s eye. It is election time, after all.
My friend was talking about politicians, of course. The Chancellor’s Budget U-turn on the dividend allowance had vexed him in particular. Never mind the emergency taxation code applied by HM Revenue & Customs to cash accessed under pensions freedoms which vexed so many clients.
I had no good answer. Or rather, I had an answer, but not one he wanted to hear. The question, I said, is not whether changes in pensions and retirement regulation will continue but whether they will be in a major or minor key. This is because money talks, and pensions are expensive.
The size of the bill
More than £130bn of taxpayers money is spent on pensions and associated tax reliefs every year. Only healthcare consumes more of the national budget. With NHS spending rising inexorably, with increasing life expectancy and advances in medical technology, and social care spending likely to rise even faster from a lower base, the Government is going to have to look elsewhere for savings. Pensions fit the bill.
And not just this. With the number of pensioners in society rising faster than the growth of the working age population who pay their pensions (after all, in a pay-as-you-go unfunded state system every generation pays for the generation which went before), maintaining current levels of pensions expenditure becomes more of a challenge.
This is especially the case when immigration to the UK is expected to be lower in the future than in the past. For the last decade, EU migrants have swelled the ranks of the working population; their taxes easing the burden of UK PLC in paying pensions.
More than £130bn of taxpayers money is spent on pensions and associated tax reliefs every year. Only healthcare consumes more of the national budget.
At least this is how the Treasury sees it. In theory, the Department for Work and Pensions makes policy. In practice, since pensions are such a big ticket item, the Treasury is always involved. With the role of pensions minister in the DWP having been downgraded in the last Government reshuffle, the Treasury has an ever freer hand. A formidable institution, dominant across Whitehall, its role is simply to control public spending short, medium and long term. This is the lens through which it views pension policy.
What kind of cost control measures are we likely to see? That the past is no guide to the future is an investment mantra; in politics, though, it pays to look backwards as well as forwards. So further rises in state pension age, more changes to pension tax relief eligibility and the ending of the triple lock are obvious candidates.
Much, of course, will depend on the economy. If growth is strong, tax receipts rise. Benefits which looked unaffordable suddenly appear reasonable. Which brings me back to where I started. Money talks, and pensions are very expensive. Plan for the worst, hope for the best and expect more Treasury-driven changes.
Gregg McClymont is head of retirement savings at Aberdeen Asset Management