In certain articles within this series of Pensions’ News (PN), PN has focused on scepticism and, in particular, his own scepticism. In discussing scepticism, PN has invoked certain writers including a seventeenth century French philosopher, Michel de Montaigne and a writer whose illustrious career straddles the twentieth and twenty-first centuries; Mr Clive James. Scepticism features in today’s edition of PN.
Had anyone (including Mr James and M. de Montaigne – who would have had to have defied death to do it) told PN at any time up to last Saturday morning that virtually a whole section of a respectable newspaper would be given over to news about pensions, PN would have been sceptical. PN would immediately have checked the evidence but his scepticism whilst checking it would have been constant.
Last Saturday morning, PN left his house to purchase a newspaper. As he strode masterfully towards the newsagent’s, PN wondered whether the newspaper would contain an article about the subject that keeps him in employment or whether he would get a complete break from pensions and, instead, be able to read about something less technical and, arguably, more real.
PN bought his newspaper and returned home. The newspaper seemed heavier than usual and PN soon saw why this was. Virtually the entire “money” section of the Financial Times had been given over to news about pensions. Clearly, thought PN incisively, someone at the FT is concerned about pensions. PN wondered whether this was because FT journalists were worried about the pension changes about to be applied to the pension scheme of their employer (something referred to in the last edition of PN) or whether it was because they were worried about pensions on behalf of their readers. Feeling charitable, PN decided that it was the latter concern that had driven the FT to write almost exclusively about pensions and, as part of this effort, publish an article by a former pensions minister; Mr Steven (“Steve” to his former constituents and others) Webb. At this point, PN could see for himself that there was a lot about pensions in the FT and so any scepticism he may have had on that score vanished. Back to Mr Webb.
Mr Webb became as famous as (probably) any Member of Parliament could get for remaining in his post as pensions’ minister for a long time; an entire parliament in this case. Mr Webb became slightly more famous when he announced, in 2011, that 2012 would happen. Mr Webb then became more famous still (the reader will understand that PN talks in relative terms) for making a comment about Lamborghini motor cars in the context of pensions. Mr Webb announced, in March 2014 (the time the pension changes came in which permitted an individual to take his pension savings in cash if (s)he wanted), that “if people do get a Lamborghini, and end up on the state pension, the state is much less concerned about that and that is their choice”. It is possible that Mr Webb regrets making this comment since this is the one statement that most of us think of when his name is mentioned.
Mr Webb is now advocating that it would make sense for HM Government to abolish the lifetime allowance (LTA). This was the main point in his FT article. For those of you mouthing the words “what’s the lifetime allowance?”, PN is tempted simply to refer you to previous issues of PN. To save the reader mouthing other, less savoury things at this piece, the LTA is the limit imposed by HM Government on the value of all of one’s pension savings. The LTA is (essentially) whatever HM Government says it is. It used to say (in 2010 in fact) that it was £1.8m. It currently says that the LTA is £1.2m and it will say (from 6 April this year) that it is £1m. Anyone who has retirement savings in excess of the LTA will pay tax on the excess at the rate of 55%. The soon-to-arrive limit is likely to bring relatively modest earners in to the cross-hairs of HMRC’s penal tax. By “relatively modest earners”, PN means head teachers, GPs, civil servants, NHS and local government officers at (let’s say) middle management level.
In his article, Mr Webb observed that “constant tinkering with the LTA has created huge uncertainty” and he also draws attention to the fundamental unfairness of a system which could penalise individuals even after they cease to contribute to their pension plan. PN agrees with the observations but is sceptical as to whether the uncertainty and unfairness Mr Webb refers to is unintentional.
Here’s how it would work:
The value of Eric Anorak’s pension plan is currently £950,000. Eric, who has been careful with money all his life (even after his invention of a sensible outdoor coat sold well), has saved his money prudently Very wisely, Eric advises himself and then decides, on 5 April this year, not to contribute any more to his pension plan.
Fast forward a few years to Eric’s retirement and he finds that the value of his pension plan has increased to £1.1m thanks to the value of certain investments going up. Eric is then dismayed to find that, on retirement and before he has quite decided what to do, he has a tax bill for £55,000. “That can’t be right” he thinks. Mr Webb, writing in the FT of the day, agrees with Eric. Mr George Osborne, writing from his retirement home in the Cayman Islands, says that it might not be right but it is, most definitely, correct.
Mr Webb feels that the system “cannot be a good structure” on the basis, it seems, that it should be rational and fair. PN agrees that rationality and fairness are laudable aims but is sceptical as to whether these laudable aims are even close to what the present government has in mind when it comes to pension saving. HM Treasury and HMRC , it seems to PN, drop ice cubes down the vest of fairness and they are therefore most unlikely to do what Mr Webb suggests and “seize the opportunity” of abolishing the LTA and so make pensions simpler and fairer. PN’s scepticism has made him feel that after spending several years making the system as complex, risky and fundamentally unfair as possible, HM Treasury is unlikely to change its plans on the invitation of a former pensions minister who is, unfairly perhaps, remembered for appearing to invite individuals to spend their pension savings on a somewhat noisy (in PN’s view) Italian sports car.
For any adviser thinking that the new limits on pensions are unlikely to affect his or her clients (after all, what has this got to do with any other area of law?), think again. Many employers are coming to terms with the fact that many of their higher earners will be affected by new annual and lifetime allowances. In short, it will soon cease (if it hasn’t already) to be worthwhile making any contribution to their pension plan. They will, therefore, need to leave the pension scheme. It follows that employers will need to think more creatively about how to reward affected employees; particularly if the employer in question wants to keep the employee in question. PN can tell you, the reader, that many employers are thinking creatively and the best of them have been doing so for some time already.
If one listens carefully, one can hear what seems to be the sound of someone banging his fist against something. PN leaves you with the thought picture that it is Mr Webb banging his desk with his fist or, quite possibly, his forehead. Why (he may be thinking) did I make the crack about the Lamborghini? Life can be very unfair can’t it? If you, the reader, are sceptical about this, well done you. Do, however, look at some of the evidence of unfairness. This, PN feels, is contained in the transitional measures which HM Government has put in place for the annual allowance.