Ten things A-Day doesn’t do
This is the second part of yesterday’s BeeLine which outlined my top ten things that A-Day does. I’m having a Nick Hornby moment, if you remember. The following is my top ten list of things that A-Day doesn’t do…..
1. Simplify pensions. At the moment we have what is arguably one of the most complex pension systems in the world and it has indeed been described as such by the Pensions Commission 1. The idea of the A-Day changes was to radically simplify the pension system in the hope that more people would understand it and be able to know what they are doing when they put money aside for the future. I would argue that the post A-Day pension system will be just as complex as the one it is replacing, partly because of the transitional protections (that effectively preserve the current complexities within the new regime) and partly because of the changes made by the 2004 Pensions Act. In my opinion we are simply swapping a highly complex system that we have grown used to for a different, but equally complex system that we can’t fully understand as yet. I referred to this in an earlier BeeLine as ‘Pension Complification’ and, if we had plenty of spare time on our hands, I could probably demonstrate that is a better description of what’s happening than to refer to it as pension simplification.
2. Replace complex benefit limits with a simple Lifetime Allowance. This is a funny one in that it has made both my top ten list of things A-Day does and also what it does not do. The idea behind the Lifetime Allowance (as I understand it) was that our present system based on maximum emerging benefits led to most of the current complexities. The idea that we would all have a maximum lifetime pension pot that we could fill up as and when it suits us with a fairly relaxed attitude to the limitations on contributions does, on the face of it, sound easier to understand. If that was what we’d actually ended up with I suppose I’d have to agree it would be simpler. However, in practice (because of the way Scheme Pensions are usually ‘valued’ using a factor of 20:1 at any age and for every type of pension benefit) the only real purpose of the Lifetime Allowance is to allow us to calculate the maximum emerging benefits. For scheme pensions, the maximum pension will always be one twentieth of the value of the Lifetime Allowance. So from 2006 when the Lifetime Allowance will be £1.5 million, the maximum emerging pension benefit from all sources will be £75,000. So in 2006 any scheme pension not exceeding £75,000 will be able to be described as being within the £1.5 million limit even if the cost of providing it is more than £1.5 million. Indeed, it is possible the true cost of such an annuity in 2006 for someone in their early fifties could be nearly three times higher than the Lifetime Allowance (at around the £4 million mark 2), but be deemed by the legislation to be within the £1.5 million for valuation purposes. For that reason it is not true to say that we are switching from a system based on maximum emerging benefits to one based on a maximum monetary sum. We are simply changing from one complex way of providing maximum benefits to another.
3. Extend pensions to those who don’t already have them. The real nature of the pension crisis in the UK is that half the workforce have no pension savings and no likelihood of getting any anytime soon 3. The A-Day legislation does nothing to make pensions suitable investments for the millions in the workforce who need them. This is being left to future reforms yet to be dreamed up.
4. Stop women losing out under the state pension system. Many of the people who lose out because of the way the present pension system is structured are women. For many women private pensions are not suitable investments because of the way they can be effectively taxed at 100% if they are not entitled to a full Basic State Pension (BSP). Most women are not entitled to a full BSP, so it is unfortunately true to say that the present system does not suit half the citizens of the UK. The A-Day legislation does nothing to address this fundamental problem either.
5. Stop means-testing acting as a deterrent to savers. Quite apart from the fact that many women can end up effectively paying 100% tax on all or part of their private pension savings, the Pension Credit system ensures many other people are taxed at 40% on theirs. The idea of the Pension Credit was that it would ‘reward’ people for making private savings. The way this works in practice is that people are ‘rewarded’ by having 40% of such private savings taken away from them if they qualify for the Pension Credit. Needless to say this makes pension saving unsuitable for millions more people in the UK workforce. The A-Day legislation does nothing to make every pound saved in a pension worth at least one pound in extra wealth to those who save.
6. Introduce compulsion. The changes on A-Day (6th April 2006) have got nothing to do with the introduction (or non-introduction) of any form of pension compulsion. All the talk around pension compulsion is to do with the next set of reforms the Government is currently teeing up. The A-Day changes are mainly focussed on rebuilding all our existing pension schemes and arrangements to a new tax model, that’s all.
7. Introduce later retirement ages. Similarly, the A-Day changes do not include introducing later retirement ages for public servants or anyone else. That too is something the Government has pushed into the long grass of future reform. The current changes do introduce the ability for people to defer taking their Basic State Pensions in return for a lump sum payment or a higher pension from a later date, and the minimum age from which private pensions may be taken is increasing from 50 to 55 in 2010, but that’s not the same thing. The opportunity for us all to work longer and thus shorten our retirements will come up out of future reforms if we’re lucky.
8. Introduce a Citizens’ Pension. If you read the papers you could be forgiven for thinking that the A-Day changes have something to do with introducing a so-called Citizens’ Pension, but they don’t. A Citizens’ Pension is a suggested replacement for the contribution-based Basic State Pension that we’ve had since 1948. (Most people still call that the Old Age Pension by the way, especially OAPs.) Depending on who you hear using the term, Citizens’ Pension means different things anyway. When Government people say it they tend to imply it would be at the level of the current Basic State Pension (around 80 quid a week for single people 4), but where industry people talk about it they tend to mean a pension of around £109 a week or so that would do away with the means-tested Pension Credit 5. Either way it doesn’t matter because it’s still pie in the sky and has nothing to do with all the legislation going down around A-Day.
9. Get people to join the empty Stakeholder schemes. The previous set of pension reforms we had a few years ago introduced something called the Stakeholder Pension. At that time all employers with sufficient relevant employees (and who’d want irrelevant ones anyway?) were required to make such a scheme available to their employees. Overnight the number of pension schemes in the UK thus increased from merely 100,000 to 400,000. A great success! The only downside to the whole thing is that the vast majority of the 300,000 new schemes never had anyone join them 6. This current, and in those terms next, set of reforms from A-Day seem to have quietly ignored the scandal of these so-called shell schemes. There is nothing in the A-Day changes that is aimed at filling them.
10. Do away with the need for pension gurus. I once said in a radio interview in answer to the question “What is the biggest problem with pensions?” that it was probably the fact people like me were needed in the industry at all. As far as I can tell I’m one of the people who are referred to as pension gurus; I know that for a fact because I read it in the Sunday papers once and I suppose it wouldn’t have been in there if it wasn’t true, would it? But whatever we’re called, there’s certainly a whole bunch of people who, like me, get immersed in the pointless complexities of the stuff that those who know what’s best for us churn out all the time on the various and varied aspects of pensions. By doing that we can try to make sense of it for everyone else who simply can’t spare the time to keep up with it all. The enormous amount of legislation put on the statute books to bring in the simplified A-Day changes doesn’t do one thing and that’s for sure; it doesn’t hang people like me out to dry!
3 November 2005
1. The First Report of the Pensions Commission - Pensions, Challenges and Choices, Executive Summary, October 2004.2. FSA Pension Annuities Comparative Tables, average rate of all 7 providers listed, based on a male non-smoker age 50, spouse 3 years younger, 100% spouse’s pension, monthly in advance, guaranteed 10 years, increasing in line with RPI.
3. The Pensions Commission, Key Facts from the First Report of the Pensions Commission, October 2004.
4. & 5. thepensionservice.gov.uk
6. ABI – Stakeholder Pensions – Time For Change, August 2003.
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This document is based on Scottish Life's current understanding of the Finance Act 2004.This may be affected by future changes in legislation and the individual circumstances of the investor. Independent advice must be sought regarding the effect on a specific individual or scheme.