What savers need is not tax breaks, it’s simplicity: pensions are baffling because Governments keep changing them.
March 17, 2023 3:42 pm(Updated 3:56 pm)
I fully sympathise with those of you who find articles on pension saving less than straightforward and categorically not scintillating, but I would like to say: don’t blame me and my colleagues.
We would love to explain, for example, that this is your annual allowance. A plain figure. Zero confusion. But instead all we can say is: this is likely to be your annual allowance, but it will depend on how much you earn and whether you’ve already started taking money out of your pot, and so on.
You can see why the plain, informative pieces I long to write get bogged down. And here’s why: politicians tinker so relentlessly with pension rules that nothing stays fixed for long.
After Jeremy Hunt announced his decision to scrap the lifetime allowance – currently if you have over £1.08m saved you will have to pay between 25 and 55 per cent tax on anything you take out above this limit, something Hunt did away with at the Budget – one of my first thoughts was: what happens when it’s reversed?
Because since 2010, the lifetime allowance for pensions and the annual allowance (the former is how much you can save tax-free into your pension in total, the latter every year) have seen a major change roughly every other year – sometimes both at the same time.
And let’s not forget the pension freedoms George Osborne ushered in in 2014. Previously you had to take out an annuity – these provide an income for life and while predictable have sometimes come with some very low rates of return, making them unattractive. But after Osborne you could take out some money and keep the rest invested. Everything we understood about turning our retirement pots into income was ripped up, and a whole new array of options were introduced for us all to get our heads around.
There is a real danger in changing the pension system so routinely – even when you do it for the right reasons. And that is you confuse people; you overwhelm them; you push them ever-further from engaging with their savings. Each change has a knock-on effect that adds to the sense that everything is constantly moving.
While it’s hard to say what the perfect pension set-up looks like, it’s clear that moving the goalposts as you plan for retirement is likely to result in the least perfect set-up.
Financial advisers are getting calls from people wondering what to do before Labour gets into power. These calls are made from people with sizeable pensions, but all the same it makes me anxious. No one should be making significant decisions about their future based on electoral guesswork and what a future government may or may not do.
What pension savers really need – beyond tax breaks – is simplicity. Adding more complexity merely chips away at people’s confidence to save over the decades. And makes it harder for people like me to explain the benefits.
So how do you plan your pension when everything is changing? Focus on the rules as they are today. My dream scenario would be for cross-party agreement on leaving pensions well alone for at least the next decade.
If the rules stay consistent, you can get on with saving and I can get on with writing pension articles that don’t bore you to tears.