It’s about time the Government came clean and admitted that it has no intention of removing the requirement for pension investors to purchase an annuity by age 75. If the Treasury admitted this fact, at least people could make an informed decision as to whether they want to save within a pension fund.
The reality is that the Government doesn’t want to remove the annuity purchase requirement because the cross-subsidy inherent in annuities saves them money.
Those who die young – often workers with tough lives on factory floors, subsidise pensions of individuals living beyond normal life expectancy, who enjoy higher incomes as a result. The Government’s intention is that this will make many ineligible for state means-tested benefits.
“For a Government that is supposed to be encouraging us to save, the Treasury’s attitude is hard to understand,” says Ian Luder, tax partner at accountants Grant Thornton. “Many of my clients are reluctant to put more money into a pension scheme because they know they will be obliged to purchase an annuity at 75.
“The Government has recognised that life expectancy is increasing and is making us work longer before we retire and collect our pensions. Why not acknowledge this by raising the age threshold for annuity purchase to 80 or 85?”
And with the effective killing off of Asps, the disincentive to save in a pension scheme is greater.
“This is an extremely disappointing move by the Government which will further damage the already low confidence which people have about pensions,” was the reaction from Andrew Tully, pensions technical manager at Standard Life.”
And it’s not just annuities where the Government is duplicitous. The real purpose of the national pensions savings scheme is to make the 50 per cent of workers and employees with no private pensions – largely the poorer half of the population – pay for what they get free in non-contributory state benefits.
Those living in rented accommodation in retirement, as highlighted recently by the Pensions Policy Institute, will be worse off by joining NPSS because they would otherwise qualify for housing benefit of 70 a week or more, on top of pension credit. With current consumer debt, most families on average or low earnings will be better off reducing debt than saving in NPSS.
The PPI too has called on the Government to be honest and provide information on who will benefit from NPSS, and who will definitely not.
“Differences in the suitability of personal accounts means people will need very clear information to help them decide whether to stay in or opt out,” says Niki Cleal, director of the Pensions Policy Institute.
To make matters worse, the Government is not only dishonest but incompetent. That is the only explanation for the extraordinary series of U-turns it has been forced to make – on putting residential property into Sipps, backtracking on ill-thought out changes to trusts, and now effectively killing off Asps and pension term assurance because of the Treasury’s failure to see the consequences of its legislative changes, and neurosis about tax avoidance.
As Andy Bell of Sipp provider AJ Bell puts it: “The Government seems to be paralysed by an unfounded fear of people passing their hard-earned pension savings on to their heirs, even after a reasonable tax charge to neutralise the tax reliefs. If only the Government would have consulted us seriously on the solution!
“This is the third botched attempt to solve a problem that only exists in the paranoid minds of the pro-annuity lobby in the Treasury. Instead of keeping it simple, it is the Government’s ill-judged solutions that are creating the loopholes.”
When will the Treasury learn to listen? We can only hope senior officials might be a little more amenable to consultation with the industry once Gordon Brown is Prime Minister and has other things on his mind.
The Government is this week due to publish its second pension White Paper and so, with customary contempt for Parliament, huge portions were leaked to a national newspaper at the weekend.
According to the reports, employees enrolled in NPSS Personal Accounts will be banned from transferring existing pensions assets into the scheme for at least eight years. Good quality company pension schemes will be awarded a “quality” mark to encourage them not to abandon their schemes when Personal Accounts comes into force in 2012.
An official body, or Delivery Authority, with be assigned statutory powers to oversee the design of Personal Accounts and minimise the impact on existing occupational schemes. The Government also intends to offset the costs for employers by phasing in the compulsory 3 per cent contributions over three years.
The Government’s apparent determination to address the threat of levelling down will certainly be music to the ears of the industry and may allow some providers’ five-year business plans to add up again – if the measures work, of course.
The proposal to include protecting existing schemes as one of the prime functions of the Delivery Authority is an improvement on the Pensions Bill, which appeared to give the prospective body an overwhelming mandate to do whatever it could to make Personal Accounts work.
But commentators doubt that a “quality” mark – however colourful and well designed – will dissuade employers with good pension schemes from pruning them back when competitors are ditching their schemes or reducing contributions.
Elsewhere, the news is less encouraging for insurers, with reports that the Government has opted for a Personal Accounts system that will offer a limited choice of funds but not the ABI-supported branded products. The IMA may have won this argument.
Then again, whatever megacorps get the contracts, what should have been advocated was a system with advice. Then savers would understand what they were doing. But then, how on earth can you bring in a half-baked compulsory system – sorry opt-out system – which relies on consumer ignorance if they were able to talk to advisers.
Lorna Bourke, Consumer’s View