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The flexibility factor

Wealthtime legal director David Baker talks about the increasingly flexible approach to wealth management and political party positions on pensions

Labour: Damaged private pension provision in the last 10 years
Labour: Damaged private pension provision in the last 10 years

With a general election looming, it is interesting to look at party positions on pensions. Labour, it has to be said, has, accidentally or otherwise, done much to damage private pension provision over the last decade and more.

Starting with the removal of pension schemes’ ability to reclaim tax on dividends, it has progressed through increasingly burdensome regulation, which has now pretty much ended final-salary schemes for future employees. Indeed, some of these schemes have been closed for existing members. Unthinkable 10 years ago.

The introduction of pension “simplification” is also having its effect. True, it has no effect on average earners but it will certainly restrict benefit entitlement for higher earners in the future – the people who make the decisions on the provision of pension benefit for their employees.

These restrictions have since been significantly compounded by the 2009 Finance Act and last December’s PBR, under which higher-rate tax relief on large one-off contributions is effectively capped and that, combined with increased tax on higher earners from April 2010, will have its effect on pension contributions as a form of saving.

Add to that the fact that the annual and lifetime allowances are unlikely to be increased after 2011/2012 and one can see that pensions are going to form a diminishing part of a higher earners savings.

There is also the additional disincentive of the increase in the minimum age at which pension can be drawn to 55 in April 2010. This seems utterly pointless and means that pension funds are going to be locked away for even longer than at present – in contrast to the position in the US where schemes allow pre-retirement access.

Surely now is the time this approach should be considered in the UK as it must provide a significant incentive to save?

On top of all this there is also the requirement for individuals not in scheme pensions to buy an annuity at 75. With the current very low annuity rates this virtually amounts to confiscation of pension funds. The alternative – an alternatively secured pension – requires any funds left at death to be given to charity or suffer swingeing tax penalties of up to 82 per cent.

Why? There is no logic at all in penalising someone just because they happen to live beyond age 75.

The Conservatives have indicated they will abolish this. It cannot come soon enough. With these disincentives, no wonder so few new employees are now offered attractive pension savings opportunities.

The panacea proposed by the Government is the personal account, or Nest, set to be operative from 2012 but could be delayed. No one seriously believes, under the current proposals that this will produce funds which will be anywhere near enough to provide a significant retirement income.

Although the above comments apply in theory equally to the private and public sectors, they are in practice a world apart. The latter appears immune from the pain affecting their private sector counterparts with their continued access to final salary schemes, indexed linked pensions, all usually unfunded – except by the tax payer.

Labour has fudged this issue for too long. Surely, whichever party wins the next election must have the courage to address this glaring inequality, which threatens to create a new underclass in society – the retired private sector worker.

It is not primarily just a moral issue – the financial cost of servicing even the current accrued rights of public sector workers are, particularly with current demographic trends, in reality already unaffordable.

Looking to the future, it must surely be for higher earners that pensions will increasingly become just a part of their overall savings strategy and not even the major part. This is, as has been said, partly because of the restrictions to their tax exempt status, and partly also because of the alternatives such as Isas and offshore bonds.

These developments will be aided by the increasing popularity of wraps which facilitate managing one’s wealth more easily and efficiently.

The days when clients would identify their house and their pension as their two main sources of wealth are inexorably coming to an end and an increasingly sophisticated and flexible approach to wealth management and financial planning is taking its place.

This will continue, which-ever party ends up in power.

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