Although the first six months of this year may have witnessed a retirement revolution - with the pension freedoms in April and Ros Altmann’s appointment as pensions minister following the Conservative victory in May, the pensions industry remains as complicated and opaque as ever.
With the chancellor set to unveil a raft of announcements in tomorrow’s summer Budget, we hope he might take the time to listen to a few ideas from our own pensions manifesto.
If there’s one main message to get through to the government, it’s to fight for a more simple and straightforward industry. It’s time to get rid of the bureaucracy that is pensions and remove the red tape and convoluted policies that serve no purpose other than multiply the level of administration required.
The pension input period is a classic example of seemingly pointless HMRC policy to work out tax relief on an individual’s pension contributions when surely the tax year timeframe would suffice.
Take the lifetime allowance too – the limit on the amount of pension benefit that can be drawn from pension schemes. It may be seen as the government’s weapon of choice to limit pension savings, but it’s time to seriously consider abolishing it and certainly, in the short term, to stop messing with it.
The limit on the lifetime allowance is set to reduce further next April to £1m unless the chancellor surprises us all tomorrow.
If the annual cost of pension tax relief is delaying the government from scrapping the LTA, then the exchequer should promptly look to fix the annual pension allowance at an affordable, sustainable and sensibly indexed rate.
The LTA does nothing but tax good investment growth in the market and penalises those in both public and private sector schemes. It may have originally been introduced as a progressive idea for the industry, but it has proved to be anything but.
If the government wants to be progressive around savings, how about they consider introducing a combined Isa and pension annual limit to give people a choice around how they save to best suit their circumstances. We think Isas should be seen as a core part of retirement planning and with no lagging uncertainties around tax liabilities, what’s not to like?
The forthcoming budget should also see George Osborne reiterate the government’s proposal for annuity reforms and the introduction of a secondary market. There is no question in our mind that the government will turn its back on the idea – the only question that does remain is whether it will be the consumer or the annuity providers who benefit from the move.
Although the principle of a secondary annuity market is a sound one, as a priority, safeguards should put in place around fair pricing to protect the consumer. Because the market is a traded market among a limited circle of providers, there is a danger a secondary annuity market will not offer anything like fair value to people cashing them in – and the average person on the street would have no idea whether the price offered to them was a decent one.
The government needs to mandate a valuation method for an annuity resale market that is transparent and universal. A huge number of people in this country have been ‘over sold’ into an annuity in the past, but if a secondary market forces the big six providers to offer a decent shout back, then that’s only a good thing.
We think the amount of bureaucracy around pensions must cost the exchequer a phenomenal amount, so it’s simple really. It’s time to tackle the complex mess that is the pensions industry.
Jon Gwinnett is pensions technical manager at Nucleus