Pension advice: The benefit of mistakesPosted on: 07 April 2015 by Steve Wanless
Pension changes have been coming thick and fast, but the promise of pension “advice” or rather “guidance” has taken a lot longer to materialise, says Steve Wanless.
Learning from your mistakes can be a real asset. There is nothing more demoralising that realising you have been through this once before and how did you manage to let it happen again!
Learning from the mistakes of others is just as useful – and a lot less stressful and potentially damaging. That is especially true in the financial world.
With the frequency of changes to regulations concerning investments, tax and pensions, plus the inventiveness of scammers to get hold of other people’s money, it makes sense to monitor newspapers, TV, the internet and the radio.
Don’t forget the radio. Paul Lewis and his Radio 4 “Money Box” programme – Saturday lunchtime and Wednesday afternoon – is not only a great way of keeping up-to-date, but it also frequently includes guests who are experts in a particular financial area and listener phone-ins.
As ever, the listener must take further advice before making final decisions. But at the very least, it gives valuable background information so that any worries and questions can later be directed to their Independent Financial Adviser (IFA).
There were more pension changes in this year’s Budget to follow the scrapping of the need to buy an annuity last year; that means there’s another new batch of regulations appearing in 2016. That could also mean another re-think to your long-term pensions plans.
The chancellor has offered some relief to those who have suffered under the annuity regime.
From April 2016, the five million holders of pension annuities – the lifetime income bought with your pension pot – will be given the choice of exchanging that guarantee for a one-off cash payment.
So there are more decisions to be made – and ones that certainly have to be taken carefully and with the help of an IFA; that cash windfall will be taxed and many might not appreciate how reassuring that guaranteed income is until it has disappeared.
While the government’s pension changes have been coming quick and fast, the promise of pension “advice” or rather “guidance” has taken a lot longer to materialise.
We have known for a while that the service will be called Pension Wise, but the phone number (030 0330 1001) and the phone lines were only operational for a few weeks before the pension reforms kicked in.
Bodies, like the National Association of Pension Funds [NAPF], welcome the news, but everyone in the industry would have preferred the phone lines to be up and running a lot sooner.
Don’t forget that Pension Wise is offering “guidance” – not advice. Their brief is to help those with pension pots plan their pensions and tell them how to shop around.
More importantly, Pension Wise will NOT
- Give technical advice
- Advise on which particular product is right for you
- Advise on how to mix an annuity with drawdown
- Give help on investments
It is expected that the most likely guidance to come from Pension Wise will be to tell the client to see an IFA!
Even those some way off retirement are likely to be affected by the chancellor’s budget after George Osborne yet again reduced the maximum amount that can be held in a pension.
That seems a strange trend when the government is encouraging people to save in pensions, especially through the workplace pension.
In 2011-12 the limit was £1.8million; by 2016-17 it will be a £1m. That might seem a lot and the chancellor claimed that only 4% of those approaching retirement would be affected.
Yet, most actuaries and accountants reckon the percentage will be much higher.
One senior actuary explained: “A lower life-time allowance will force people to guess whether investment returns could take them above £1m when weighing up the case for adding to their pension savings.
“Even with the allowance being indexed from 2018, someone who has £705,000 in a pension pot now can expect to hit the limit if they achieve investment returns of 5% a year before retiring in 10 years’ time, so it’s not just people with seven-figure pension pots who could stop saving now.”
Although the lifetime limit will be indexed, it will be linked to the consumer price index, a measure of inflation that is typically lower than the retail price index.
The week of the budget was a good time to have the pensions minister, Steve Webb, appear as the subject of the Fame & Fortune feature on the back of the Sunday Times Money Section.
Even the headline was interesting – “Retirement? I don’t think I’m the type”
When Webb was asked “What aspect of the tax system would you change?” his response was:-
“Tax relief on pensions needs a look. If you want to put a pound into a pension, it costs me only 60p because I get tax relief at 40p as a higher-rate taxpayer. If someone in my office pays the standard rate, it costs them 80p to put a pound in the pension, and I just don’t think that’s right.
“My personal view – and it is purely a personal view – is we should have some sort of flat-rate relief, maybe two-for-one – you put in £2 and the government puts in £1.”
A recent survey on the unbiased.co.uk website tested Webb’s proposal of a flat-rate of 33% tax relief across all pensions – 55% were against it, 45% were in favour. The site’s view was that pension savers are attached to the concept of higher tax relief for high-rate taxpayers, and the greater planning potential this offers.
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