Over 10 years since the original pensions simplification legislation, things are more complicated than ever. What with annual allowances, tapered annual allowances, lifetime allowances, carry forward, fixed protection, individual protection and enhanced protection, all with different dates and limits, it is no wonder the general public has lost interest.
I joined the profession before the 1986 Financial Services Act came into force, after which adviser firms could choose between being tied and independent, and I have seen a lot of changes, most for the better.
However, pensions, at that time the poster child of financial services, have become less and less popular and ISAs in their various guises have assumed this role. I hope ISAs do not suffer the same fate and political interference that pensions have.
End the meddling
The advice profession should look to reclaim pensions from the politicians and ensure the wider population embraces their advantages, rather than just being sold the negatives. The only way to achieve this is to make pensions really simple to understand and then leave them alone.
There need to be separate rules and limits for defined benefit (DB) and defined contribution (DC) schemes, as was the case in the past. Terms need to be kept simple, confining ‘pension commencement lump sum’ and ‘uncrystallised funds pension lump sum’ to history.
For DB schemes, the government should:
1. Remove the annual allowance entirely.
2. Increase the lifetime allowance (LTA) to £1.5 million.
3. Ensure all schemes have penalties for retirement before age 60, except on ill-health grounds, so pensions are seen as retirement income vehicles, not ways of accessing capital in middle age.
For DC schemes:
1. Remove the LTA and the tapered annual allowance entirely, thereby removing the need for protection and allowing everyone to make contributions again.
2. Cap personal contributions at £50,000 (gross) or 50% of salary, whichever is lower.
3. Cap employer contributions at £25,000 or whatever the employee pays, whichever is higher, ensuring high earners can no longer receive pension contributions in excess of 100% of salary.
4. Increase the limit for non-earners to £5,000 (gross), in line with the lifetime ISA.
5. Fix the tax relief on contributions at 25% and change the name to government bonus.
6. Increase the maximum age at which personal contributions receive tax relief to 10 years after state pension age.
7. Ensure the minimum age at which benefits can be taken remains 10 years below state pension age.
8. Enshrine the 25% tax-free cash entitlement in law.
9. Increase auto-enrolled contributions to 5% employer/5% employee by 2020/21.
10. Pass legislation quickly to protect employees in master trust auto-enrolled schemes.
11. Only adjust the above limits every five years, and then in line with the increase in the state pension over that period. The new limits would be announced in the Autumn Budget, giving pension providers, advisers and individuals time to prepare before they come into force.
For the self-employed:
1. Expand the auto-enrolment legislation to self-employed individuals, allowing them to base their contributions on the previous year’s accounts.
2. Minimum contributions should start at 2% in the first year and rise by 1% each year, assuming an increase in earnings, until they reach 10%. If earnings fall, a contribution identical to the previous year must be paid.
Everyone’s a winner
I do not advocate the removal of the lifetime ISA, but to sell it as an alternative to a pension is a scandal waiting to happen.
If the profession can reclaim pensions from the politicians, the level of poverty in retirement will fall, future governments will see an increase in the tax take and the cost of state benefits will go down as people will actually have planned properly for retirement.
Daniel Wackett is managing director of Altorfer Financial Management.