When attending the recent Actuaries Pensions Conference in Glasgow, I heard behavioural change expert Nick Southgate suggest that maybe the name ‘pensions’ was the thing holding pensions back.
I doubt this message made it all the way to Downing Street, but today’s budget suggests George Osborne and his treasury team are having similar thoughts. The fact that today’s “pensions” green paper was issued by HM Treasury says it all. This is not about pensions, it is about tax.
The view of George and his chums has long been that tax relief on pensions has been too generous. Today’s announcement of the tapering of pension tax relief for high earners following from the recent chop to the lifetime allowance is clear evidence of that. These measures are likely to cause some damage to the pensions eco-system because if high-earners lose interest in pensions, they may lose interest in providing them to everyone else.
Therefore, the claim that the government is approaching this consultation with “an open mind” certainly makes it hard for me to set my natural cynicism aside. Paragraph 1.1. states people need “adequate savings” not “adequate income” for retirement – a telling use of language?
Early parts of the paper provide an undertone that only increased longevity has caused the demise of defined benefit schemes – a gross simplification (lower interest rates, forced indexation, regulatory burden, lower incentives for employers etc. anyone?).
The paper rightly notes the clarity offered by the Single Tier State Pension as to the level of income that will be offered by the State going forward. There is also little to argue with the pension freedom ethos of allowing people to receive income in a form of their choosing. Anecdotal and survey based evidence is indicating that recent changes have encouraged greater interest and greater participation in pension saving.
Crucially though, an age restriction applies such that this “freedom” can only come from age 55 (an age which will surely rise in future).
Pension saving has to be incentivised up-front. The money has to be “locked away” until it is ready to be used for the intended purpose – to do anything else would be folly. Why would anyone pay taxed-income into a locked vehicle when they can pay it into an unlocked one e.g. ISAs? Simple, they would not.
Pension saving is for providing income in retirement. It is not something that can be dipped into based on short term requirements (such as a new car or a sunshine holiday). Pensions need to be rescued from being lumped in with other savings vehicles.
I look forward to considering the paper further and I hope the pensions community provides many constructive and innovative responses to it. Perhaps my cynicism will prove to be misplaced.