Jeff PrestridgeNov 1 2017

Make pensions simple

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If you were given a blank piece of paper and asked to devise a simple way of incentivising people to save, you would certainly not come up with the hornet’s nest that is today’s pension. Not a chance. Not in a million attempts.

As a result of relentless tinkering by successive governments, we now have in place a long-term saving plan that is no longer fit for purpose. It is riddled with rules that only the very best of actuaries have a chance of understanding.

Saving, surely, should be simple and not require a brain the size of Stephen Hawking to understand it. But that is where we are. Our pensions system now resembles an impenetrable Chinese puzzle.

Or closer to European Union home – for the time being at least – a Rubik’s Cube.

Of course, tax relief on contributions provides all of us with a great incentive to save in a pension for our old age. Auto-enrolment has ensured 8.5m more workers now get the benefit of it. Hurrahs all round.

Tax relief on contributions provides all of us with a great incentive to save in a pension

But in a quest to keep control over the total cost of this generous tax break – £38bn a year – governments are continually introducing new rules. A tinker here, a tinker there. More complication followed by widespread bewilderment – and head scratching – among the long-term saving community. A Rubik’s Cube in both left and right hand.

It should not be this way. Pensions should not be the play toys of politicians and their ranks of smart advisers. The rules should be simple and straightforward and we should be allowed to save in the knowledge that our prudence will be rewarded – not be thwarted by a cap here or a cap there. We should be confident that sacrifices made today for the benefit of a time when work is no more are worthwhile. That the goalposts do not move half way through our journey towards retirement.

Maybe as financial advisers or financial connoisseurs you disagree with me – after all, complexity allows you glory as white knights in shining armour. As a result, maybe you are happy that we have a system in place that allows politicians to introduce ever more restrictions. If so, I respect your view. But hear me out.

The result of all this political meddling? A cut in the annual allowance to £40,000 (April 2014). A scandalous reduction in the lifetime allowance (2010, £1.8m; 2016, £1m). A bewildering reduction in the annual allowance for additional rate taxpayers, resulting in it falling to £10,000 for those earning in excess of £210,000 (2016). And let us not forget the reduction in the money purchase annual allowance from £10,000 to £4,000 (2017).

Enough surely to turn a teetotal actuary to drink.

Now rumours are rife that Philip Hammond, our country’s rather unpopular chancellor of the exchequer, is planning more pension change to heap on all that has already changed. A Rubik’s Cube for left and right foot as well as both hands. Pension madness dressed up as inter-generational fairness.

The idea is to skew the pension tax relief system in favour of the young. Not necessarily by giving the young more relief than is currently available, but by restricting tax relief on contributions for the elderly. By "elderly" it could be anyone in their mid to late 40s or early 50s. These older citizens would either lose their right to higher rate relief on pension contributions if they pay higher rate tax, or they would be given a reduced annual allowance, limiting their scope to build more pension wealth.

No doubt some smart academic – or Treasury intern – dreamt up the idea after popping a few pills and watching a digitally restored version of The Exorcist. I say this because the idea is a horror.

Not only would it bring more complication into the pension arena, but it would also penalise millions of people who, through no fault of their own, have got to their mid 40s or early 50s somewhat pension light – a result maybe of unemployment, taking time out to have children or not having the opportunity to contribute towards a pension. They would be thwarted in their attempts to build a worthwhile retirement fund.

Rather than complicating matters even more, our politicians should be striving to make pension saving as simple as possible.

If I were standing in Mr Hammond’s expensive shoes, the first thing I would do is be done with the lifetime allowance, which penalises both prudence and investment success.

If I had to make any other change, I would introduce a flat rate of contribution relief – say 30 per cent – in the interests of fairness.

Simultaneously, I would order another review into public sector pensions. Although all the focus is currently on the demise of defined benefit company schemes – or ways for employers to reduce their pension liabilities – public sector pensions trundle along very nicely thank you. In many cases, at great cost to the public purse.

It is time defined benefit arrangements in the public sector were brought to a close with defined contribution being the norm going forward.

Pension fairness across the workforce and greater simplification. Not more complication. Please Mr Hammond. Please.

Jeff Prestridge is personal finance editor of the Mail on Sunday