Typically, a pensioner couple receives around £230 per week from their private pensions, rising to £300 per week for recently retired pensioner couples. But this success story is under threat.
The decline of defined benefit (DB) pension schemes means that, despite mass auto-enrolment in the UK, the Government forecasts median income from private sector pensions to be less in 2050 than in 2020[1]. And this unfortunate picture pre-dates recent assaults on tax incentives for pensions; the main parties’ manifestos seem all too happy to continue these assaults, but the ACA argues that these are short-sighted measures.
Through the last two Parliaments, both Labour and the Conservative-Liberal Democrats coalition have boosted the State pension and encouraged more employees into basic private provision. But persistent over-regulation of DB schemes means they are unnecessarily expensive and provide employers with volatile costs, leading to fewer open schemes and reducing the levels of private pension earned by members.
The ACA says that ‘more damaging still has been the raid on private pension savings by governments looking to generate income: the “simplification” introduced in 2006 has been consistently eroded and made more complex by multiple reductions in relief, bringing the complexity of approaching or exceeding the Lifetime Allowance and Annual Allowance to significantly more people. Individuals on moderate to high earnings are increasingly having to face up to the fact that they will need to stop sensible retirement saving through a pension arrangement because of the adverse tax consequences. The limits are much more painful for those in Defined Contribution arrangements than those in Defined Benefit arrangements, who can amass almost twice as much pension before hitting the Lifetime Allowance’.
This is why the ACA recently produced a paper[2] calling for the parties to pause before committing to further pension tax changes, to avoid committing to further ill-judged reforms.
However, the ACA notes that most of the manifestos still see pension tax relief as a political cash-cow, funding pet initiatives to target key voter groups. Already, the changes made in the 2015 budget begin to make ISAs a more attractive alternative to saving through a pension scheme. Locking savings away for the long term in growth assets significantly benefits industry and individuals whilst saving in ISAs may generate lower returns and be more short term in nature.
The ACA adds that the current Pensions Minister, Steve Webb, has a strong understanding of the issues outlined above and has taken the Liberal Democrats’ policy in a direction that mirrors the ACA’s call. Their policy also hints at introducing auto-escalation in pension contributions in the future, where both the Conservatives and Labour have been more timid.
ACA Chairman, David Fairs, comments:
“We are disappointed that the political parties are using cuts in pension tax relief as a ‘cash-cow’ for other projects instead of a proper review of the tax structure. We need a stable, long term strategy for retirement savings”
So which manifesto?
Our view is that some policy continuity and stability would be good for the industry, so the ACA welcomes the fact that the main parties all support the single-tier pension and the ‘triple lock’, auto-enrolment and (even) the new pension flexibilities, although extra regulatory tweaks can be expected if Labour leads the way.
However, despite the welcome proposal to undertake a review ahead of further pension tax changes from the Liberal Democrats, all the main parties’ manifestos fall significantly short of the ACA’s recommended manifesto published in March – set out on pages 5 and 6 of Placard.
Pleasae download Placard below
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