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faced with the obligation to increase
their contributions fromApril 2018.
4
Moreover, there’s an overwhelming
tendency for scheme members of all
ages to remain invested in the default
pension fund on offer, whereas choosing
a slightly riskier alternative might
provide significantly better long-term
returns.
5
So getting people to think
more about their pension pots is crucial
to encourage them to think about
retirement, and how much money
they will realistically need to get by,
while also making informed choices
about how they invest.
Automatic enrolment was complicated
by the introduction inApril of the
Lifetime ISA (LISA), which can be used
to save either for a deposit on a first
home or for retirement.While that
flexibility may be attractive to younger
people keen to get a foot on the housing
ladder, the risk is that they will opt out
of their employer’s pension for the sake
of a LISA.That would mean losing out
on the employer’s contribution.
Meanwhile, the government is sending
distinctly mixed messages to more
established pension investors, with
a series of reductions to the lifetime
allowance – the overall amount of
pension savings that you can have at
retirement. It has been cut repeatedly
over recent years, from £1.8 million in
2011/12 to £1 million inApril 2016.
Because the lifetime allowance applies
to both contributions and investment
growth, these reductions, illogically,
penalise successful investors whose
funds have prospered.And it is not as if
today a £1 million pot actually yields
a particularly generous annual income:
a fund of this size would produce an
index-linked secure income of just
£23,600 as at May 2017.
6
Most recently, the amount that can
be contributed to a pension once it
has been accessed flexibly – the so-called
‘money purchase annual allowance’ –
has been slashed from £10,000 to
£4,000.While the aim was to prevent
people withdrawing money and then
reinvesting it with further tax relief, in
practice this reduction also hits those
who, for whatever reason, needed to use
their pension pot but subsequently had
an opportunity to build it back up again
from their earnings.
The pension system’s tax breaks are
an easy target for a cash-strapped
government – but its persistent
tinkering works against its own message
that we all need to make provision for
our retirement. Nonetheless, the bottom
line is: that is exactly what we must do.
Faith Glasgow is Editor of
Money Observer
RETIREMENT
The government’s
persistent tinkering
works against its own
message that we all
need to make provision
for our retirement
Getty Images. Sources: 1 The Pensions Regulator,April 2016-March 2017’, July 2017; 2, 4 ScottishWidows, ‘Retirement Report 2017’, June 2017; 3 ‘Royal London Policy Paper 2.The Death of Retirement’, February 2016; 5 Decision Technology, ‘Damage by Default:The Flaw in Pensions Auto
Enrolment’,April 2017; 6 Money Advice Service comparison for an individual retiring at 65 providing a 66% spouse’s pension on death assuming no guarantee on the pension and the spouse is 3 years younger than the member, along with the pension increasing with RPI inflation, May 2017
THE INVESTOR
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