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We seem to go out of our way to ensure that anything to do with pensions is as “un-user friendly’ as possible. What should be an astonishingly popular savings structure is normally greeted with either a yawn or resigned indifference. This has come about partly as a result of political interference though tinkering and ill informed (although often well intentioned I hope!) changes by politicians, but also to a great extent by an industry primarily focused on the benefits to itself rather than to its clients. After all how often do you hear references to our “assets under management”, “our funds” and “our portfolios” and of course they are not – they are yours.
Pensions thus should be seen as an astonishingly tax efficient savings wrapper which we should all be treasuring, understanding and appreciating. Instead most just ignore it out of fear of finding out how inadequate it might be, ignorance as to what it could achieve or confusion because of outdated language written by an industry desperate to maintain financial mystique regarding their capability and expertise.
Now, however, we are seeing a fundamental change in the pension world, not sadly brought about because of a sudden wave of enlightenment by the providers and politicians, but out of the stark necessity that something was going to have to be done to enable an ageing population to try and finance itself.
Successive governments over the years have done little to help, whether from technical tinkering through to what some could regard as corporate “theft” as when Gordon Brown withdrew the valuable tax benefits on pension dividends back in the late 1990s. Additionally, the government’s inability to provide an effectively funded state pension scheme has merely meant that today’s ageing populace must be supported by tomorrow’s tax payers – National Insurance was valuable in concept but bankrupt in worth. So, from this base we are now seeing changes which have the potential for some radical innovations with opportunities for both accountants and financial planners.
Firstly, we have now been seeing the rolling out of auto-enrolment to all businesses from Tesco to the local takeaway. So far, this has only affected the larger businesses but over the next two years this will be rolled out to those far smaller businesses, and no doubt we shall be seeing a significant logjam as many try to get heads around the extensive bureaucracy that it will involve. This though is just the start of the process towards the ultimate goal of compulsory pensions. Sadly to date our politicians of all colours over many years have failed to grasp this nettle and to make the responsible decision which although potentially unpopular in the short term, is the key one to make – to make sure we all start providing our pensions ourselves.
Have we been here before? Once upon a time some may recall that of course your National Insurance payments were for your pension – and how much did the government save for us? Zero. A learning point here for us all – never trust a politician with your savings!
However the other key innovation which has come through as a result of this year’s budget announcement was the change in access as we – as pension savers – can at last be given access to our pension pot and not just be restricted to the previous drawdown rules.
This certainly came as a surprise and as a change should be welcomed. After all, it finally allows those wise savers who have had the wit to put money aside into a pension pot, access to what after all is their own money. It also would finally do away with one of the most obnoxious elements of pension payments, as some people would have been unable to draw out all of their monies because of the tortuous systems that previous regimes have imposed.
Some of the childish statements by populist politicians about people rushing out to but a Lamborghini served to perfectly illustrate their lack of understanding of savers’ attitudes; if you had been bothered to save hard for your retirement, you would be hardly the irresponsible person who would then go out and blow it all!
The key issue is the drawdown, as of course apart from the free element, everything else that would be taken out would be subject to income tax. That after all was probably why the Chancellor did it in the first place. Now what accountants and financial planners need to advise their clients on is this process of drawdown and investment. The headlines screamed the death of the annuity. This was not true. What was a change was that now there is far greater flexibility so that at some stage an annuity may well in fact far better value, when the odds are in your favour. We must remember that an annuity is just a bet, albeit often quite a large one; a bet with an insurance company on how long you are going to live for. Thus at 65 your annuity rates are always going to be a poor option, as most of us will have many decades ahead of us. However at 85, the odds will have changed so annuity for a shorter period of time may well be better value as a guarantee for your last few years.
The key investment issue therefore is going to be the period between the drawdown and the application of the funds for annuity or care costs at that later date. Planners will need to consider a lower risk investment portfolio effectively operating as an “inflation +” portfolio which sustains its value but can add some strength gently as it goes along. Such portfolios are likely to be found in the Personal Injury Sector, where often some not dis-similar issues are to be found.
Then there is going to be the issues around inheritance. Eventually it would be nice to think that pension pots could be more fairly transferred across the generations, but for the time being this area will be requiring careful tax and financial planning.
This year will be seen as having been the time for some fundamental changes in pensions, but frankly this is only the start. Like most things that are heralded as a simplification, they normally result in some further confusion. This will mean there will be even more demand for the accountancy and financial planning professions to help their clients, and for once we will really be able to see if they provide actual benefit.