Unlock Editor’s Digest for free
FT editor Roula Khalaf selects her favorite stories in this weekly newsletter.
It takes 40 years to plan for a successful retirement and it can last 40 years (if you live to be 100). Therefore, the entire process will span the duration of multiple governments.
In recent decades, there has been a big push to boost people’s commitment to their pensions. Unfortunately, this has been undermined by the large number of amendments that have been made to the legislation. This culminated in the autumn budget proposal to introduce an inheritance tax (IHT). charge on pension funds transmitted after death.
Whether you agree or not with each legislative change is beside the point: the problem is that it erodes confidence in pensions in general.
I started saving for a pension in 1997 during my first job; I was assistant editor of a pensions magazine, so it seemed rude not to. I quickly learned that the pensions industry was a surprisingly interesting area to report on, full of complexity and change. But what makes good writing for journalists is often bad for consumers. After 27 years of trying to explain pensions to readers, friends and family, I know the rules are too complicated.
The Financial Conduct Authority has just announced that 75 per cent of consumers aged 45 and over either do not have a clear plan for how to withdraw money from their pension or did not know they had to choose. So the regulator is putting forward proposals for additional support for millions of UK savers to make decisions about their pensions, citing issues with trust and a lack of engagement leading to the “ostrich effect” where they fear knowing the reality of their pensions. pensions.
I hope it works. But I suspect the level of knowledge is so low that the potential for confusion is much greater than regulators realize. Consider the latest research from investment platform Hargreaves Lansdown which found that only 40 per cent of people know their pension is invested in the stock market. It is a statistic that should lower the standards of pension professionals.
How bad have the touch-ups been? Alan Smith, founder and chief executive of wealth manager Capital Partners, sums it up well: “Your pension fund is now subject to IHT. Before this proposed change it was not. But before that it was. But you no longer have a lifetime allowance. Before that you did. And before that you didn’t. You now have an annual allowance. Before that was introduced, you didn’t do it. But before that you did it! It’s bordering on comedy. And that’s not good.
Not all pension changes have been bad. I am thinking about the introduction of pensions for interested parties in 2001, automatic enrollment in 2012 and pension freedoms in 2015. Automatic enrollment had its foundations in the work of the Pensions Commission, chaired by Lord Adair Turner from 2002 to 2006, and has led millions to save for retirement. It is surely unthinkable for any government to undo that.
But there is a big difference between this kind of revolutionary change and constant adjustments to the limits of the rules.
I looked at the history of the annual allowance since it was introduced in 2006 and the wild changes made my eyes burn. It rose to a high of £255,000 and then fell to a low of £40,000. There were only eight of 18 fiscal years in which the rules remained the same as the previous year.
Can’t we have a simple number and raise it in line with inflation? No, politicians argue. They have to make it “fair” for everyone. Thus, in 2015 we saw the introduction of the annual money purchase subsidy (aimed at people who had begun to collect their pension), while in 2016 there was the gradual annual subsidy (aimed at people with high incomes). All this means that the annual allowance section of HM Revenue & Customs’ pension tax manual is 4,888 words long. I doubt there is an expert alive who can memorize this.
The lifetime allowance has suffered a similar story, with so many ups and downs that professionals no longer trust that government decisions will endure. After the March 2023 budget, when the Conservatives scrapped it, a Standard Life survey found that 69 per cent of independent financial advisers thought it was risky for clients to rely on the removal of the remaining lifetime allowance. The Labor Party has not yet reintroduced the lifetime allowance, but the prospect still looms.
If you want to see what happens when people no longer trust that pension rules are set in stone, look at the run-up to this year’s budget. People took tax-free cash or made additional contributions to their pensions based on rumors. It all got so silly that the government’s guidance website resorted to urging the public not to withdraw tax-free cash because of budget rumours.
Now, after the Budget, some advisers are telling their clients to wait and see if a future government can reverse the IHT rules on pensions. This has led some financial planners to end the year 2024 by rightly comparing pension planning to “sticking jelly on the wall.”
How have we arrived at this state of affairs?
I think part of the problem is that most decision makers are too shielded from pension concerns. Politicians and officials have defined benefit plans, which make preparing for retirement much easier. Having even a small element of guaranteed income to plan for and the assurance of an employer who will deliver on that promise is a huge help.
But the vast majority of pension savers are in defined contribution pensions, where not only do they themselves have to deal with the changing rules, but they have added uncertainties about investment returns and the timing of their death.
To explain the latter, when you draw income from a defined contribution pension fund, you need to keep some funds aside as you don’t know when you will die and therefore how long you will need for the funds to last. Adding IHT to pensions also means trying to time your death, deciding when is a good time to start donating the surplus.
We simply cannot allow pensions to continue to become a political toy. Pensions require a lifelong investment approach (something regulators and governments often claim). That makes it even more inexcusable for politicians to change pension rules for the sake of good ownership and increased income, rather than a carefully thought-out and well-explained ideological change.
It is time to achieve a cross-party political consensus on pensions that provides clear rules that are protected for decades to come.
Moira O’Neill is a freelance money and investing writer. Email: moira.o’neill@ft.comX: @MoiraONeill,Instagram @MoiraOnMoney