Reforming retirement

It could be extremely complex both in terms of administering a group DC system and establishing how the investments are managed, particularly if any definition of the word ‘guarantee’ is involved. This means cost and opacity – two concepts that move in the opposite direction from the government’s pension reform agenda.

On top of this, while such schemes have been in place for many years in the Netherlands they have not been universally popular, particularly in recent years as commentators have questioned the fairness of risk sharing on a large scale between generations – which is how they work. CDC is a worthy ambition but is not likely to impact an IFA’s working day any time soon. File under ‘watch list’ until the theory starts resembling practice and leave the day-to-day debate to the pension anoraks (like me).

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Tax relief reform

Having reformed almost everything else at retirement, why not change the tax system too? Again, a pet subject of pensions minister Mr Webb, along with other prominent government advisers, pension tax has been widely criticised for favouring higher earners due to its two-tier system. Why should higher earners get larger cheques back from the tax collector than lower earners when they save into a pension?

Webb’s proposition is a flat 30 per cent rate for all, but that begs more questions. Unless income tax bands are also moved to a single flat rate (which is highly unlikely and completely outside of Webb’s remit) that means everyone will receive a different level of tax relief to the actual rate of income tax that they pay.

For many it will be higher than their standard tax rate, for others lower. Trying to work out the maths on all that could take some doing and could involve much scratching of heads come self-assessment time as personal pension savers try to work out what element of relief has been taken at source and what needs to be declared.

Webb has achieved far more pension revolution than anyone would have expected, but this is where the line should be drawn. An interesting theoretical debate, but 30 per cent tax relief is years away and should not concern hard working IFAs.

Scrapping the lifetime allowance, however, is a great idea. Having a limit to the amount of tax-free savings is, as Mr Webb pointed out, ‘illiberal’ and contradictory to the general thrust which is to encourage everyone to save as much as is feasible into a pension. The tax benefits of the lifetime allowance are circular, as the more money that is earned by saving, the more is available to be spent after retirement, at which point it is recycled back into the economy and the overall impact is multiplied.