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A successful retirement takes 40 years to plan and can last for 40 years (if you live to 100). So the whole process will cover the span of multiple governments.
In recent decades, there has been a keen drive to boost people’s engagement with their pensions. Unfortunately, this has been undermined by the sheer amount of tinkering with legislation that has gone on. This culminated in the Autumn Budget proposal to introduce an inheritance tax (IHT) charge on pension funds passed on after death.
Whether you agree with each legislative tweak or not is besides the point: the problem is that it erodes trust in pensions overall.
I started saving for a pension in 1997 during my first job — I was assistant editor of a pensions magazine, so it felt rude not to. I quickly learnt that the pensions industry was a surprisingly exciting area to report on, full of complexity and change. But what makes good copy for journalists is often bad for consumers. After 27 years of trying to explain pensions to readers, friends and family, I know that the rules are just too convoluted.
The Financial Conduct Authority has just announced that 75 per cent of consumers aged over 45 either do not have a clear plan for how to take money from their pension or didn’t know they had to make a choice. So the regulator is setting out proposals for extra support for millions of UK savers to make decisions about their pensions, citing issues with confidence and disengagement leading to the “Ostrich effect”, where they fear knowing the reality of their pensions.
I hope it works. But I suspect the knowledge bar is so low that the potential for confusion is much higher than regulators realise. Consider the latest research from investment platform Hargreaves Lansdown that found only 40 per cent of people know their pension is invested in the stock market. It’s a statistic that should take pension professionals down a peg or two.
Just how bad has the tinkering been? Alan Smith, founder and chief executive of wealth manager Capital Partners, sums it up nicely: “Your pension pot is now subject to IHT. Before this proposed change it wasn’t. But before that it was. But you no longer have a lifetime allowance. Before that you did. And before that you didn’t. You now have an annual allowance. Before that was introduced you didn’t. But before that you did!” It’s verging on comedy. And that’s not good.
Not all pensions change has been bad. I’m thinking of the introduction of stakeholder pensions in 2001, auto-enrolment in 2012 and pension freedoms in 2015. Automatic enrolment had its foundations in the work of the Pensions Commission, chaired by Lord Adair Turner from 2002 to 2006 and has led millions to save for retirement. It is surely unthinkable that any government would undo that.
But there’s a big difference between this type of revolutionary change and constant tinkering at the edges of the rules.
I looked at the history of the annual allowance since it was introduced in 2006 and the wild swings made my eyes sting. It went up to a peak of £255,000 and then down to a low of £40,000. There were only eight tax years out of 18 in which the rules stayed the same as the previous year.
Can’t we have one simple number and lift it in line with inflation? No, politicians argue. They have to make it “fair” for everyone. So in 2015 we saw the introduction of the money purchase annual allowance (targeting people who had started to take their pension), while in 2016 there was the tapered annual allowance (targeting high earners). All this means the annual allowance section of HM Revenue & Customs’ pension tax manual runs to 4,888 words. I doubt there’s an expert alive who can commit this to memory.
The lifetime allowance has seen a similar story of so many ups and downs that the professionals no longer trust government decisions to endure. After the 2023 March Budget, when the Conservatives removed it, a survey by Standard Life found 69 per cent of independent financial advisers thought it was risky for clients to bank on lifetime allowance removal remaining. Labour is yet to reintroduce the lifetime allowance but the prospect still lurks.
If you want to see what happens when people no longer have confidence that pension rules are written in stone, look at the run-up to this year’s Budget. People took tax-free cash or made extra pension contributions based on the rumour mill. It all got so silly that the government guidance website resorted to urging the public not to withdraw tax-free cash over Budget rumours.
Now, after the Budget, some advisers are telling clients to wait and see if a future government may reverse IHT rules on pensions. It’s led to some financial planners ending 2024 by quite rightly comparing pension planning to “sticking jelly on a wall”.
How have we got to this state of affairs?
I believe part of the problem is that most of the decision makers are too sheltered from pension worries. Politicians and civil servants have defined benefit plans, which make the task of preparing for retirement so much easier. Having even a small element of guaranteed income to plan around and the security of an employer who will deliver on that promise goes a long way.
But the vast majority of pension savers are in defined contribution pensions, where not only do they themselves have to deal with the flip-flopping rules, but they have added uncertainties around investment returns and the timing of their death.
To explain the latter, when you draw income from a defined contribution pension fund you need to keep some funds aside as you don’t know when you will die and therefore how long you need to make the funds last. Adding IHT to pensions means attempting to time your death as well — by deciding when is a good time to start giving the surplus away.
We simply cannot allow pensions to become a political toy any longer. Pensions require a lifetime investment approach (something often stated by the regulator and governments). That makes it even more unforgivable that politicians would tinker with the pension rules for the sake of a good headline and revenue raising, rather than a carefully thought through and well explained ideological change.
It’s time for a cross-party political consensus on pensions that delivers clear rules that are protected for future decades.
Moira O’Neill is a freelance money and investment writer. Email: moira.o’neill@ft.com, X: @MoiraONeill, Instagram @MoiraOnMoney
