Lower TVs and less DC saving…

…is perhaps an unlikely reaction to today’s budget consultation response. However, this could be the result of 2 of the measures announced today.

Locked away for too long

My first reaction following the budget this year was that DC might finally be something I have a real interest in saving money into. I am absolutely in favour of the reforms to give people more freedom with their pension savings. However, the reforms didn’t go far enough in my view. There was still the inflexibility of the money being tied up until 55, over 20 years away in my case. This is too long to tie my money up, there are so many scenarios I can think of in which I might need that money sooner whether it means I’m penniless in retirement or not.

Yet today it got worse still. Today it was determined that my money will be locked up until at least 58! That’s at least another 3 years before I can get at it and so another 3 years later before I START putting money into a DC pension. NISAs seem a much nicer way of doing things.

As an aside, the consultation response put “fairness” at it’s heart. It’s difficult to see why increasing the age at which you can access your own money is fair. Especially to the many people who don’t make it to retirement.

If all transfers are rational…

…then there’s some serious selection risk.

The area of most controversy in the consultation was on whether to ban transfers from DB schemes. Unsurprisingly following the reaction to this suggestion such a ban has not been implemented for all but unfunded public sector schemes. However, “safeguards” have been added such that independent advice must be obtained.

Given this, it perhaps reasonable to assume the majority of transfers will be rational decisions. But if this is the case then they must be better than average risks as far as the scheme is concerned. Should transfer values be reduced to take this into account?

Reduction in the annual allowance – an opportunity

I read Josephine Cumbo ‘s article on pension tax relief being back on the agenda for Osbourne’s Autumn Statement in Sunday’s Financial Times with interest. The suggestion was that the annual allowance, the maximum amount you can put into a pension and claim tax relief on, may be reducing to as low as £30,000 a year.

I actually see this as an opportunity. I blogged just recently on my view on how long term savings can be improved and a reduction in the annual allowance for pensions makes such a scheme even easier to implement. Combine this fall in the pension annual allowance with an increase in the ISA allowance to same amount and you are well on the way to getting rid of pensions policies in place of flexible savings vehicles with incentives to keep money invested for retirement.

Industry interests

Someone commented earlier on a copy of my blog on Mallow Street that ISAs:

do not generate commission, and from the pensions industry point of view, this is a disadvantage. Indeed, they would compete for funds with conventional dc pensions.

Competing with conventional DC pensions is precisely the idea! This comment comes after comments from Michael Johnson that providers are holding back pensions reform. The pensions industry needs to stop worrying about change and have a good hard look at itself. It only has its self to blame for any industry wind-up.

Rethinking pensions saving

Anyone who knows me in pensions knows that I don’t like Defined Contribution (DC) pensions. They also know that I do like Defined Benefit (DB) pensions, that I believe these to be the most efficient way of providing pension benefits and that I am convinced that better regulation and scheme design is all that is needed for these to thrive again. However, it is hard not to accept that the change in direction that would be needed for this to happen is huge. So in the meantime we need to make DC better.

We need something new

DC pensions are actually nothing new. In fact I would go as far as saying they are very old, as old as DB pensions. What’s changed is that long ago when DB thrived DC was targeted at high net worth people who wanted control of their investments. Now DC is being targeted at the masses who don’t. What they want is either pension or savings. My biggest criticism of DC pension schemes is that they are not pension schemes, they are tax advantaged savings with strings attached.

Today’s world is very different and the young people of today have different problems. Is it right that we (as a nation) are trying so hard to encourage them to put money into a pension policy that they can’t access for 30, 40, maybe even 50 years. I certainly don’t want to and dislike the tax incentives that mean I sometimes feel I have to.

A new form of savings account

If we started with a blank sheet of paper what would we like to achieve?

I think we would look to achieve the following:
– Something that encourages people to save.
– Something that allows people to use money how they want.
– Something that encourages people to make long term savings such as for retirement

How can we achieve this?
– Tax relief on savings made (in line with relief currently on pension savings)
– Complete flexibility to take the money when you want (like an ISA)
– Pay back of tax relief on withdrawals made before retirement (to provide a disincentive to early withdrawal)

The current tax positions and flexibilities of both pensions savings and ISAs would be replicated but people wouldn’t have to make the choice of pension or ISA. Savings would be there to be used when needed.

This would be revenue neutral to the extent that we are happy with the current tax relief position of pensions and really mean it when we say we want to encourage more savings.

It would also come with the advantage of being able to abolish DC pensions with a rebranded ISA, a name that people trust.

Let’s really have a savings revolution.