Ludicrous ‘Pisa’ symbolic of lopsided pension reforms

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Ludicrous ‘Pisa’ symbolic of lopsided pension reforms
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We hear from The Sunday Times that ministers are “backing away” from a radical plan to turn pensions into Isas, despite calculations from Morgan Stanley that it could benefit the government to the tune of 1 per cent of GDP per year.

A pensions Isa, dubbed ‘Pisa’, brings to mind the leaning tower of pensions and is a ludicrous acronym, but perhaps one fitting for a ludicrous idea. Hopefully this is the end of the matter.

Of course, things would be simpler were the systems brought in line. But simplicity, as any investment adviser can tell you, is not necessarily a recipe for success when it comes to encouraging saving and investing.

Look at stakeholder pensions. Reforms there may have begun the process of cleaning up charges – especially punitive upfront fees – and stopped a merry-go-round of switching at the end of clawback periods for group personal pensions.

But the reforms certainly did not help spread the pension habit. Pensions, even price-capped ones, did not fly off the shelves. One Labour pension minister even said 95 per cent would be bought direct, which has to be one of the worst predictions in the history of politics. That is why we have auto-enrolment.

It is to be hoped Conservative ministers rehearsed some arguments about the ‘pensions into Isas’ reform to themselves and realised they were complete bunk. Simplifying pensions by making them less generous might have seen even fewer fly off the shelves. How so? It’s rather easy. It is called opting out.

Yet it is still clear that the top rates of tax incentives must still be in the firing line

All this is before one even considers the damage done to the political message to which all mainstream parties are committed – that is, if you work hard to do the best for yourself and your family, the government is on your side.

So that is perhaps why we have seen a retreat – admittedly, an unconfirmed one at this point.

Yet it is still clear that the top rates of tax incentives must still be in the firing line. Hargreaves Lansdown has suggested the end of the top-rate reliefs is inevitable. Morgan Stanley has run through several options, all of which benefit the government fiscally, for now at least.

I have spoken to one employer pension adviser who is convinced the whole direction of reform is about reining in the liabilities of what are effectively state defined-benefit pension schemes.

And it’s unlikely that any opposition parties – whether Labour, the Lib Dems or the SNP – will really get their teeth into opposing the change if it only hurts higher-rate taxpayers. They will probably decide they can do much better by concentrating their fire on state pension changes.

It appears likely, therefore, that the system will change – but not as radically as promised. It will still have implications for your advice and planning recommendations. It will cause some headaches for your wraps and platforms. It suggests that anyone with some money to invest should seriously consider using their pension allowances to the full.

Someone ought to calculate what any change might mean for GDP and the government’s fiscal position in 30 years’ time as well as right now. Well, here’s hoping.

John Lappin writes on industry issues at www.themoneydebate.co.uk