Of course, the main aim of retirement
planning is to provide an income for the
entire period of your retirement – and
that could be a long time. Government
statistics published in its green paper
Strengthening the incentive to save: a consultation
on pensions tax relief [July 2015]
, points out
that a man who reached 65 in 2012 can
expect to live for a further 21 years, and a
woman for 24, and longevity is expected to
increase further.While the increased flexibility
in how pension income can be taken is
welcome, the most important thing is to
build a retirement fund that is large enough
to last the rest of your life.
The tax incentives to do that have already
been reduced: just a decade ago, there
were few limits on the amount that could
be saved in a pension pot. In 2006, the then
Labour government introduced a lifetime
allowance of £1.5 million and, while that
was gradually increased to £1.8 million by
2010, it has been falling ever since – next
April it will be £1 million and will stay there
until 2018, when it will rise in line with the
Consumer Prices Index.The government
will allow some protection for those with
pots above the £1 million level, although
the details have yet to be announced. From
next April there will be further restrictions
for those with an income of more than
£150,000 per annum.
One of the proposals in the government’s
green paper is to end tax relief on
contributions completely, shifting to a
regime similar to that for ISAs, under which
there is no tax relief on contributions but
withdrawals are tax-free.While Chancellor
George Osborne says he has an open
mind on reform, he adds:‘With increased
Gallery Stock
I
t is now six months since the biggest
shake-up in pensions in a generation
greatly increased flexibility over
when, and how, benefits can be taken.
The impact of these changes has
not been properly assessed yet and there
could be further changes as the government
consults on even more radical alterations.
The most visible impact of pension
freedoms has been on annuity sales.While
it has long been possible to draw a flexible
income from a pension fund, rather than
buying an annuity, rules on the amount
that could be withdrawn, coupled with the
costs of arranging drawdown, meant it was
mainly only appropriate for larger funds.
Now, however, savers are free to withdraw
as much as they like from their fund, either
all at once or in a number of instalments –
although withdrawals over the tax-free limit
of a quarter of the fund will be subject to tax
at the individual’s highest marginal rate.
Early indications are that those with
smaller pots are choosing to do just that.
The Association of British Insurers (ABI)
said that, in the first 100 days after pension
freedoms, £1 billion in cash was taken from
pension pots through 65,000 withdrawals
– an average of more than £15,000 per
withdrawal. Income drawdown accounted
for a further £800 million of withdrawals
across 170,000 policies, while 11,300
annuities with a total value of £630 million
were purchased.That compares with the
peak for annuity purchases of £1.2 billion
per month in 2012, when income drawdown
accounted for just £100 million per month
1
.
DrYvonne Braun, the ABI’s Director for
LongTerm Savings Policy, said:‘The data
shows people with smaller pots tend to be
cashing them out, while those with larger
pots tend to be buying a regular income
product, such as an annuity. It also highlights
an increase in the number of people putting
money into income drawdown products that
can take advantage of the new freedoms.
‘We are just a few months into the biggest
overhaul in pensions for a generation, which
was introduced in only one year, so some
issues still need to be worked through.’
longevity and the changing nature of
pension provision, the government needs
to make sure that the system incentivises
more people to take responsibility for their
pension saving so that they are able to meet
their aspirations in retirement. If people are
to take responsibility for their retirement, it
is important that the support on offer from
the government is simple and transparent,
and that complexity does not undermine the
incentive for individuals to save.’
The financial incentives for reform are
clear: tax relief restrictions introduced since
2010 have saved the government £6 billion
a year but the green paper says a simple
estimate of the cost of tax relief, less the
tax received on pension income, is
£21.2 billion a year.
Set against that, however, is the need to
encourage people to save for retirement,
although pension freedoms, coupled with
the automatic enrolment into workplace
pensions, is raising the profile of the issue.
Given the uncertainty around tax
incentives, investors should be concentrating
on maximising their pension contributions
while they can.As Ian Price, Divisional
Director for Pensions at St. James’s Place,
says:‘My time in the industry has taught
me that no one knows what the regime
will be in a few years, so you have to
invest according to the rules that exist today.
Everyone should be reviewing their affairs.
High earners, in particular, should
consider making contributions now while
tax relief is still available.’
A broader portfolio of investments,
including ISAs, has become more popular
for providing retirement income, both
because of changes to working patterns and
the erosion of tax reliefs, with retirement
getting later or phased over a number of
years. Pensions will, however, remain a core
component of retirement planning.
1Association of British Insurers,July 2015
Balance sheet
While the full impact of pension
freedoms is not yet clear, and with more changes to
come, investors should consider maximising their
contributions while tax relief is still available.
Investors should be
maximising their
contributions while
they can
IN YOUR INTEREST
PENSIONS
THE INVESTOR
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