What should be done to our muddled and over-complicated pensions system?
We (our politicians, that is) have created a pensions monstrosity that even hardened actuaries now fear and struggle to comprehend.
The question I raise is one all the main political parties will provide their thoughts on as we painstakingly move towards June 8 when, barring a miracle, Theresa May and her Conservative Party will triumph spectacularly.
The manifestoes have yet to be published – not that their contents are to be trusted – but it is quite obvious that both Labour and the Conservatives are keen to meddle even more with our pensions.
Not for our greater benefit, mind you (perish the thought), but to cut the ever soaring cost of boosting our pension contributions with juicy tax relief. A boost that currently costs the Exchequer some £30 billion every year. Money that could be deployed (wasted) elsewhere.
The Conservatives have so far adopted a cowardly approach to pensions, chipping away at the edges so as to keep a lid on costs but not being brave enough to push through radical reform. They fear an almighty middle class backlash (via the Daily Mail) if they interfere too much.
Dastardly Tory moves in recent years (in coalition and out of it) include reducing the value a pension fund can grow to before swingeing taxes are applied to any excess – and making future pension accumulation a nigh on impossible task for additional rate taxpayers with the introduction of the tapered annual allowance.
The ordinary annual allowance mere mortals must adhere to (non 45 per cent taxpayers) has also been shaved by £10,000 to £40,000 (a figure that includes employer as well as employee contributions).
An attempt to restrict the funding of pensions once taxable income has been taken under George Osborne’s pension freedom regime (by cutting the so-called money purchase annual allowance) has only been thwarted by May’s decision to call an election.
Maybe a resounding victory on June 8 will encourage the Conservatives into more adventurous pensions reform. But more likely is yet more meddling, making pensions even more incomprehensible and turning yet more some people off saving altogether. No doubt, a handful of baffled actuaries will seek counselling as a result.
If Jeremy Corbyn and his clown of a Chancellor John McDonnell somehow get into power, higher rate pension tax relief will be a goner. As sure as McDonnell’s unequivocal love for Karl Marx and his writings; as certain as Corbyn’s admiration for the Cubans and Palestinians.
In recent weeks, a number of pension experts and respected think tanks have had their say on what should happen to our pensions. Even the actuarial profession has got in on the act as evidenced by the pensions manifesto released by the Association of Consulting Actuaries.
They all make interesting observations on possible reform, including the need for an overhaul of tax relief, greater simplification (yes please) and an extension of auto-enrolment (the regime that requires employers to opt most workers into pension schemes).
So, what do I think? What would I do if (god forbid) I were the Chancellor of the Exchequer post June 8?
Well, here is my pensions manifesto. It is personal (not coloured by whom I work for), not entirely original (my thoughts on tax relief are based on proposals outlined by the Centre for Policy Studies) and it would never be entertained by short-term politicians in a month of Sundays.
It would also cause great upheaval and upset lots of vested interests. But I need to get it off my chest. It is short and sweet so please persevere until the end.
First, I would get rid of pension contribution tax relief (sorry, Middle England). Instead, future pension contributions would be made from net pay (in the same way we fund our Individual Savings Accounts).
The government would then provide a 25 per cent pension contribution top up subject to an annual cap of £2,500. So, put in £10,000 (including any employer contribution) in any one tax year and you would earn the maximum bonus.
I would keep the annual allowance at £40,000 (for everyone including additional rate taxpayers), allowing those who want to fund their pension beyond the bonus-attracting £10,000 to do so. But I would axe the lifetime allowance which currently allows the government to tax pension fund values above £1 milllion. Access to tax-free cash post age 55 would still be a right with all other withdrawals subject to income tax.
Prudence should – and would – be rewarded. This reform would ensure this is the case.
Secondly, and most controversially, I would close all defined benefit schemes (public and private) so no worker could make further contributions. From the start of the new tax year (April 6, 2018), everyone (including MPs and all public sector workers) would then be required to contribute to a defined contribution scheme provided by their employer or by a financial services company (if self-employed).
This would put everyone on an even pension keel and stop the ridiculous situation where some public sector workers’ pensions are paid directly from the Chancellor’s purse.
Of course, I would ensure that the Pensions Regulator had sufficient ammunition to ensure pensions accrued under defined benefit schemes would be honoured.
Finally, I would turn auto-enrolment into pension compulsion.
Radical? Yes. Authoritarian? A little, especially with regards to the closure of all defined benefit schemes. Achievable? Yes, if only we took party politics out of pensions.
Likely? No. Corbyn has more chance of becoming Prime Minister than my pensions manifesto being implemented.
Any thoughts? Don’t hold back.
Jeff Prestridge is Personal Finance Editor of The Mail on Sunday