Pension reform: sense must prevail
Proposals for pension reform continue to stir debate. Since the Government announced it would be making a radical overhaul of pensions earlier this year, we have witnessed a steady stream of proposed initiatives.
Mainly, they revolve around pension tax breaks, ISA-style pensions and annuities. Debate and constant tweaking have led to uncertainty and distracted from the main aim: pension provision for retired people.
Creativity is an essential part of reform, but so is sense. Thankfully, the Treasury has made a U-turn on foolhardy plans to allow retirees to sell their annuity contracts. This would have gone beyond the intentions of pension freedoms and left consumers unsuitably protected.
Sense must prevail. There is no good to come from debate for debate’s sake, and no benefit to meddling with our existing pension system if the outcome results in anything but greater financial security for people in retirement.
It is concerning that the Office for Budget Responsibility felt it necessary to state that pensions are becoming ‘less attractive and non-pension savings more attractive’. The LISA is sensible and welcome, but, to my mind, an overhaul of pensions does not need to equate to a replacement of our existing structure, nor to a dismantling of it. The changes have been piecemeal and people lack certainty of legislation.
In his Autumn Statement, Chancellor, Philip Hammond, may announce proposals for new tax breaks aimed at young people. Age-dependant tax boosts would benefit the young most. He may decide that neither higher nor additional rate tax payers would receive 40 and 45 per cent tax relief on their pension contributions as they do now and annual contributions would be cut to keep costs of the new regime under control.
This approach adds complexity and restricts the core benefit of the pension for older people. The Government’s message to all ages must be that it is necessary to save actively and long term into a pension. To deviate from this central call would be irresponsible.
My perspective is that from a social standpoint it makes sense to introduce a flat rate of tax relief at, say, 30% - this would be fairer to low earners. Additionally, the Lifetime Allowance should be scrapped because it needlessly penalises investment growth. This could be tricky though as some have already taken measures to mitigate against it.
Further change to our culture of long term pension saving needs to be right. If Mr Hammond does make changes, he should bring them to the table and then make no more.