It’s been 10 years since pension simplification was introduced, but is retirement planning really any easier?
Dubbed ‘A-day’, pension simplification was a policy introduced on 6 April 2006 by the then Labour government to rationalise pension taxation rules. The aim was to reduce the complicated patchwork of legislation built up by successive administrations which was seen as a barrier to retirement planning.
“I remember I was very excited about the prospect of pension simplification,” says Ian Price, divisional director at St. James’s Place. “It promised clients a uniform set of rules to make retirement planning much more attractive.”
Unfortunately, the reality ended up being very different.
As well as pension simplification, subsequent governments’ agendas included ambitions to raise revenue and tighten the public purse. As a result, a myriad of changes were introduced back into the system over successive years. In consequence, there has been no real simplification at all.
“The reality is that, despite the promise of a simple, uniform regime, I have seen more changes since A-day than at any point in my career,” says Price. “No government can seem to leave pensions alone and changes are still being made and proposed.”
George Osborne has presided over most of the latest reform package, enacting some of the largest changes to pensions of any Chancellor in living memory. Giving people total autonomy over how they access pension benefits may be an astute political move, but by gradually reducing the amount that can be saved into a pension, Osborne has restricted the availability of tax relief on contributions.
There have also been strong hints from Mr Osborne that upfront tax relief on pension contributions will be scrapped entirely at some point in the future, perhaps in favour of an ISA-style system.
It all adds up to a constantly shifting pension tax environment that certainly does not help people to plan for their retirement.
Back to basics
Price maintains that what hasn’t changed in the last 10 years is the importance of five crucial maxims for retirement planning:
- Accept that almost everyone needs to save more for their retirement.
- Understand the risk of outliving your savings.
- Determine the size of the retirement fund you will need.
- Recognise the cost of delaying action.
- Commit to a plan and take action.
“Despite all the legislative twists and turns, these fundamentals still apply today – it’s just that the solution for some individuals may not be to fund retirement exclusively through a pension,” says Price.
Price singles out restrictions to the annual and lifetime allowances as examples of policies that are encouraging people to look at other savings vehicles.
“As pension allowances have become more restrictive, an increasing number of people have earmarked other assets for their retirement provision, such as ISAs and share portfolios.” he says.
Likewise, as the tax treatment on death has become less penal, more people with alternative income sources are ring-fencing their pension with the aim of passing it on to their family, rather than using it to fund their own retirement.
But Price says that the principles that most people need to save more and start saving earlier still apply.
“In a decade during which we have witnessed the demise of final salary schemes, a financial crisis, and countless changes to pensions, the five simple messages from a decade ago are still fundamental to achieving a prosperous retirement,” says Price.
If you would like me to help you to review your pension situation, then please drop an email to Sophie-Jane Keelaghan.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested. The levels and bases of taxation and reliefs from taxation can change at any time and are generally dependent on individual circumstances.
Representing only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the Group’s wealth management products and services, more details of which are set out on the Group’s website www.sjp.co.uk/products.