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Mike Morrison: Short-term cash at expense of long-term goals

At 5.00am yesterday I started my trek up to head office in Manchester – a busy day with the added incentive of being at the coal face to respond to any announcements in the Autumn Statement.

I did refrain from telling my colleagues that, historically, nothing normally happens if I make an effort to listen and respond. However, for once this was not the case and, from a pension perspective, there were three main changes.

Annual allowance

Annual allowance drops from £50,000 to £40,000 from 2014/15.

For carry forward purposes the annual allowance will remain at £50,000 for 2011/12, 2012/13 and 2013/14.

This was expected, in fact many thought a decrease to £30,000 was on the cards.

Interestingly, if we go back to tax year 2005/6, the earnings cap was £105,600 and the PP maximum contribution for those aged 61 to 74 was 40 per cent – so not much difference at higher ages.

At these levels it does mean that pension funding has to be over a longer period than the old level of £255,000 p.a. may have led us to expect.

Perhaps the real issue is the effect on people in DB schemes. Long service and a pay rise could well result in a tax charge (although carry forward might assist).

The fact that higher rate tax relief and carry forward have been preserved must be seen as a positive.

The real issue is the constant shadow hanging over pensions tax relief – £50K to £40K announced today, but will there be another reduction next year or the year after if the Chancellor needs a short-term fix?

We know there is a pensions crisis and this does nothing for confidence, perhaps even with regard to auto enrolment. Let us take pensions seriously and leave them alone for a while.

Lifetime allowance

Lifetime allowance drops from £1.5m to £1.25m from 2014/15 and there will be a new form of protection (or perhaps two in the form of fixed protection and/or personalised protection – details to follow).

I am not so sure about this – the confusion of yet another form of transitional protection will confuse and complicate pensions even further.

Many people who have been prudent enough to organise their savings and investments are faced with moving goal posts, with penalties for not getting it right.

When the LTA was introduced at a level of £1.5m it equated to a pension of roughly two thirds of the then earnings cap, so £66,000 per annum. Now it appears that the revised LTA would provide a pension plus spouse’s, with a small amount of inflation protection of just over £30,000 per annum.

(Interestingly, some recent research by Blackrock suggested that 31 per cent of 25-34 year olds expected to retire on an annual income of more than £30,000 per annum.)

I still come back to the point – why do you need an LTA if you have an AA – it ends up being a tax on investment performance.

Change to drawdown rules

There will be a consultation and legislation to amend the maximum drawdown limit, reinstating the 120 per cent limit from 100 per cent.

The date for this needs to be agreed quickly so that more people do not review only to have their income cut.

It is a start, but with falling annuity rates and a continued reliance on gilt yields this should be the beginning of a wholesale review of retirement income options so that we have a regime that is fair, simple and sustainable.

We will see how each change pans out, but for me it is the principle that is wrong – short-term money at the expense of long-term strategy. I cannot see the lack of pension saving finding a remedy in all this.

Mike Morrison is head of platform marketing at AJ Bell

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