A Pension Bombshell 29 July 2015

Some of my financial planning friends are still salivating from the pensions mess George Osborne has created. They cannot get enough of the chaos his tinkering has caused. Bring it on, they say.

Of course investors looking to build a retirement war chest think differently. They are bewildered and baffled by George’s meddling – and they ring The Mail on Sunday to tell me so, screaming down the phone as if I will be more impressed the louder they shout. My phone wilts in the pensions heat.

After telling them to find a good financial planner (aren’t all planners good by definition I hear you ask?) I am forced to lie down a while, take an energising Berocca drink, and recuperate from the ear bashing. I then return to my desk, only for my phone to trill again like a budgerigar on steroids.

Having got that off my chest, I am really pleased that out of all this chaos and confusion, opportunities now abound for financial planners to show their mettle.

"Out of all this chaos and confusion, opportunities now abound for financial planners to show their mettle."

And never has there been a time when confusion has reigned so supreme in the wacky world of pensions – and adviser mettle has shone so brilliantly. Planners are in their element. Seventh pensions heaven.

I say all this without considering the mounds of advice planners can now dole out as the new pension freedoms start to grip and people look to extract some of the money from their plans – £1.8bn in the first two months, according to our good friends at the Association of British Insurers.

Plenty of issues for advisers to get their shiny teeth stuck into. Taxation. Inheritance. Longevity issues. Transferring defined benefit plans into defined contribution arrangements to take advantage of new rules allowing pensions to cascade down the generations. Cash-flow modelling. I could go on, but I know you are chomping at the bit.

Returning to the subject of July’s Budget, I am still scratching my head with pensions disappointment. Despite pleas not to turn pensions into a financial minefield, and despite being shorn of a left-wing Liberal pensions minister in Steve Webb, Mr Osborne went ahead with his previous promise to cut the lifetime allowance from £1.25m to £1m, effective from next April.

It is a move which still baffles me – and will irritate me until I go to my grave. It turns pension saving for some into a lottery as they scratch their heads and wonder whether to continue funding their pension or put money into other tax-efficient vehicles such as Isas, venture capital trusts and enterprise investment schemes.

The cut in the lifetime allowance simply flies in the face of everything that a Conservative government should stand for. Provide for yourself, insure yourself against illness and death, and save like crazy for the time when retirement comes.

My take on the allowance is simple. It should be abolished. Provided savers stay within the rules and pump into their pensions no more than the maximum annual allowance of £40,000 a year, they should be allowed to build a pension fund without fear of a 25 per cent or 55 per cent tax hit. They should not be penalised for being squirrels or enjoying the fruits of successful pension management.

I know pensions minister Baroness (Ros) Altmann thinks the same, but she does not seem to have the Treasury’s ear at present. Pensions are a government expense, and in an era where cost-cutting is much in vogue, they (us) must take a proverbial haircut.

The other change confirmed in the Budget relates to the restriction in the annual pension allowance for those earning over £150,000. From next April, it means someone earning £210,000 will see their allowance restricted to £10,000. Fair? You can argue either way. Confusing? Too right it is. It brings yet another complication into an arena that already resembles the maze at Hampton Court Palace.

This brings me on to the biggest pensions bombshell contained in the Budget – the chancellor’s decision to order a review into the way I, you and your long list of clients enjoy bountiful tax relief on the contributions we channel into our pensions.

All the smoke signals suggest that the £50bn annual cost of pension tax relief is one that Mr Osborne is not prepared to tolerate for much longer. Austerity Britain, recovering Britain, can no longer afford it.

At worst, tax relief will be abolished. At best, a flat rate of tax relief – 20, 30 or 33 per cent – could be introduced. Whatever, change is just around the corner.

What should you do about it?

For a start, if you feel passionate about maintaining the current system of tax relief – personally or on behalf of clients – I urge you to respond to the Treasury’s consultative document, misleadingly called: Strengthening the Incentive to Save: a Consultation on Pensions Tax Relief’.

You have plenty of time to gather your thoughts – end of September is the deadline. I cannot think of a better way to while away your days while you relax on some Croatian beach in the searing midday sun.

And of course, I would be urging most of your clients to make pension hay while the sun shines – provided they are not up against the lifetime allowance. The tax relief your clients enjoy on their pension contributions will not be here forever.

Get pension planning, dear readers – and enjoy your summer holidays while the euro languishes and the pound thrives.

Jeff Prestridge is personal finance editor of the Mail on Sunday, published in the FT Advisor on the 29th July 2015.