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Steve Bee: The golden age of pensions is well and truly over

There was a time when announcing a pension seminar was a sure fire way of emptying a room. Today things are different. Pension seminars are packed to the rafters with people absolutely hooked on getting details of the new freedoms. How times change.

While I am pretty happy with the way this has turned out and really pleased to have lived to see the day pensions finally became acceptable dinner-party conversation, I am also very unhappy – gutted even – to see some of the other changes being introduced at the same time.

It seems to me we may have finally got the pension system we always wanted but at exactly the same time we are seeing the beginning of the end of it.

A few years ago we had something called A-Day. You might remember it. Before A-Day we had three different pension regimes: different pension rules and regulations applied to you depending on when you started saving for your pension. It was not only complicated and brain-numbingly hard to understand, it was crazy.

The amazing thing back then was that our government types thought it was crazy too and decided to simplify the pension system once and for all. The three regimes were swept away in the name of simplification and replaced by just one regime and an entirely new concept: a maximum amount someone could put into their tax-relieved pension pot while they were living and breathing on the planet – a lifetime allowance. Once you had filled your pot, that was your lot.

Of the three main pension tax regimes we had before A-Day one was really, really generous, one was a bit less generous and the other was not very generous at all. The one regime we ended up with following A-Day was the one that equated to the least generous of the three. I am not moaning about that. It was just the way it was. We all understand that. What I am moaning about, however, is that that least generous pension regime equated to a lifetime allowance of £1.8m.

The recent announcement that the lifetime allowance will be reducing to just £1m means no one in future will ever be able to get a pension that will be as good as the worst regime before A-Day would have produced.

When you hear people referring to the gold-plated pensions of the past that generous employers put in place for their employees, spare a thought for the employees of the future. Even if their employers want to provide them with gold-plated pensions they will not be able to. The golden age of UK pensions is well and truly over.

The new age we are heading for is one where it will be possible to put more into an Isa in a few decades of saving than both you and your employer can put into a pension over the same time.

Steve Bee is director at JargonFreeBenefits

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Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. terence o'halloran 11th May 2015 at 5:13 pm

    If only the right people would listen to the right people.

  2. Julian Stevens 11th May 2015 at 5:37 pm

    I dunno ~ I think the “golden age” of pensions (double digit annuity rates!) is a good 25 years behind us and the Pandora’s box opened by these new unfettered access provisions is going to cause just as many headaches, just different ones, particularly for advisers.

  3. I always thought Maxwell was the biggest crook raiding his staff’s pension fund, now I am not so sure, there are a few politicians in the frame.

  4. Paul Clifford 11th May 2015 at 7:17 pm

    A common sense approach is required around pension input amounts and the lifetime allowance really does need to increase to a sensible level to encourage pension savings and less reliance on the state in later life .

  5. Spot on – the lifetime allowance at £1 million barely gets an index linked annuity over £30k. This is terrible for someone who works hard in a senior pressurised job for 35 / 40 years!

  6. David Stoddart 11th May 2015 at 10:05 pm

    Steve bee – why should the tax payer have to fund more than a reasonable level of income in retirement? Db schemes just need to come in line so that one scheme is not more favourable then the other. The death benefits etc still make pensions a golden age.

  7. At the risk of sounding contrarian, I don’t see pensions as the bee-all(no pun intended Steve) and end-all to providing retirement income. They have their place and should be well funded but investing £15000pa into good ISA funds over 15 years with a reasonable rate of return should provide an investor with a pot of c£285,000 without too much difficulty. Very possibly £300000+ if decent dividend producing funds are used with all income reinvested over the period. At the time of deciding to turn this into income, a half decent suite of funds will provide around 6% a year in natural income tax free. Of course there are swings and roundabouts with ISAs, i.e. no tax relief on ISA etc etc but counter that with the benefit of tax free income and there may not be a lot in it. Rates from annuities/drawdown down in the past and now, providing sustainable lifetime income going forward under the freedoms and make the ISA a very sensible alternative to pension. Based on the example above, i.e. fund of £300000 at 6%pa income, how much would one need to have in a pension fund to provide £18000pa in the investors hand? I would submit a basic rate tax paying investor would need in the region of £450,000 in their pension pot to provide gross income of £22,500pa (approx), netting to £18000. Its not exact but hopefully the point is valid enough to be proven. Most pension savers don’t really value the tax relief as they never actually “see it”. Not having to pay on the income when it starts to be paid may be a far more attractive proposition. As always IMHO

  8. Douglas Baillie 17th May 2015 at 8:44 am

    Forget trying to analyse all the changes.
    What we have here is simply a Government sponsored ‘tax grab’ !

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