The recent Budget announcement that we will soon see an end to the way means-tested support for the elderly and the effect of diminishing the value of pension savings means we are now, I think, heading for a new pension future.
The Budget came with headlines screaming about the “granny tax” imposed by the freezing of allowances until allowances for all taxpayers catch up. The headline-writers largely ignored, though, the ending of a very real granny tax that has seen many pensioners lose up to 40 per cent of the real value of their pension savings and some even losing as much as 100 per cent. Losing 40 per cent or 100 per cent of the value of your savings is not much of an incentive for people to save and would have made the 13 million people about to be auto-enrolled into pension saving later this year think about whether it would be sensible to remain in the schemes they are about to be auto-enrolled into.
That is the trouble with the new pension reforms – it will be a requirement that all eligible employees are put into pension schemes by their employers but it will not be a requirement they stay in them. All employees who are auto-enrolled will have the option of opting out. If auto-enrolment had gone ahead with the present disincentives caused by the mass means-testing of support we have grown used to lately, the reforms would have ended in disaster.
The Government has shown it understands this issue and has taken the bold step of announcing that we will at last have a decent subsistence level of basic state pension for all. I think that is great.
With the means-testing problem solved at last, the new reforms now have a decent chance of succeeding but that does not mean they will.
IFAs have a role in ensuring the success of these important reforms. We are about to witness the birth of about 1.2 million new pension schemes over the next five years. That enormous number of schemes will become the bedrock of pension savings for about half the present workforce and generations of future pensioners will have their future living standards completely dependent on the value of the pensions these new private sector pension schemes deliver.
The legislation requires a minimum contribution of 3 per cent of the band of qualifying earnings to be made for employees by employers. That should be seen as a good base level, a good start if you like, but it should not become accepted as the benchmark for good contribution levels from employers. We have a once-in-a-generation chance here to work with employers and their employees to build the kind of pension schemes 21st Century pensioners will need. Let’s hope we are up to the task.
Steve Bee is managing partner at Paradigm Pensions