March was pretty eventful for us pension policy nerds. We had the opportunity to respond to the Department for Work and Pensions’ questions on automatic enrolment, John Cridland published his review of the state pension age and the Chancellor confirmed he would press ahead with reducing the money purchase annual allowance to £4,000 (only to then be taken out of the Finance Bill in April.)
But which of these is the odd one out?
Auto-enrolment took nearly 10 years’ work before it came into effect. The original proposals put forward by some well-qualified people based on significant evidence were discussed with the industry and eventually shaped into a policy most now regard as a significant success.
Meanwhile, Cridland’s review is thoughtful and, even if it does not give the answers some want, draws on a significant body of evidence to support a gradual change to pension policy over a long time period.
Legislate in haste, repent at leisure
The MPAA change came out of nowhere. And despite unanimous industry objections when it was announced in November, it was set to be pushed through on a very short timeline, with claims there was no viable alternative and there would be no cost to the industry because the MPAA was already in operation.
To add insult to injury, it now seems the Government had no hard evidence of the abuse that was supposedly the driver for the change. This policy will have a far greater negative impact on generous workplace schemes and responsible savers than any positive benefit of limiting abuse of tax relief. The change effectively limits pension freedom for many of those lucky enough to have a decent employer.
Another twist that came across my desk this week was the detailed rules on the pensions advice allowance. It seems using the allowance without “becoming entitled to all benefits” (aka crystallising your pension) will result in an individual losing scheme specific tax-free cash protection.
Protected tax-free cash is a significant benefit for many, but how can any normal human being know they may lose it if they use the allowance to fund advice? The only way they might find out is to take advice. Yet another bear trap for the poor consumer.
I wonder if the Lifetime Isa might suffer a similar challenge. Many providers seem reluctant to offer it because of concerns about the early exit penalty. It is not clear why an additional penalty beyond losing the government incentive should be needed to discourage people from cashing in the Lifetime Isa early. But what about when the reason for doing so is due to an urgent need for money, or that the person has got together with somebody who has already bought their first house? What justification is there for taking an extra 6.25 per cent of somebody’s savings then?
Patience is a virtue
We have to get away from making pension policy on the hoof. These examples show how an initially good idea can end up having a nasty sting in the tail for consumers. There is a reason good policy takes a long time: there is a lot to think through to make sure it works as intended. We do not need 10 years every time but sometimes more talk and less action is the better approach.
Richard Parkin is head of pensions policy at Fidelity International