Exploring the possibilities
I'M INTERESTED in the reduction in benefits the government intends to make to the unfunded pension scheme it runs for civil servants.This has been described as the government reflecting what's going on in the private sector as it reacts to the unexpected increases in longevity and becomes less optimistic about expected rates of return on its pension fund investments. That's not an argument I completely follow, but I suppose they're saying that as private sector employers are cutting back on their pension promises the public sector may as well do the same.
Either way, this is just the thin end of the wedge and the writing looks to be on the wall for all public sector employees, whether their schemes are funded or not. The proposed changes to the NHS pension scheme announced hot on the heels of the civil service proposals looks to be evidence of this.
However you look at it, one of the defining characteristics of the post A-Pay world is that employees, both private and public, are likely to scale down their commitments to their employees' pensions, with most commentators saying that will be a bad thing. I'm not so sure I agree - in fact, I think I've convinced myself it could be a good thing.
One feature of the pension tax laws coming in after April 2006 is the introduction of full concurrency, meaning people will be able to have as many different types of pension saving as they like on the go at the same time. The old rules saying you can't have a personal pension and a company pension at the same time for the same employment go on A-Day.
There are around 10 million people in company pension schemes in the UK at the moment, and if their pension futures look set to take a hit as their employers start saving money by cutting back on their pension promises, it seems to me it will potentially open up a new market for personal pension savings. It's even possible that people who already have pension savings could become the main source of new clients for advisers as they take steps on their own to fix their pension problems. If so, some of the changes coming in on A-Day could Interest them enormously, particularly the ability for personal pension to invest in residential property and the lifting of the age-related limits on pension contributions. After A-Day, people in company pension schemes could become very interested in the possibilities of making large tax-efficient payments into personal pensions and taking advantage of the SIPP and income drawdown opportunities that will be available to them as they take more control of their own retirement affairs. Until now, people in company schemes have been happy to leave the management of their pensions to their employers, indeed the pension laws left them little choice, but the reality of the post A-Day world may be quite different.
There must be plenty of people in their forties and fifties in company schemes right now who would like to hear about the new tax rules that will let them pay huge amounts into SIPPs and invest them in, say, a buy-to-let holiday home in France. This would be a fun investment that they could also use for their own family holidays. It would yield tax-free rents paid directly into their SIPPs, turning into pension income in their late seventies. Higher rate taxpayers could be particularly interested in this tax-efficient way of acquiring a great hands-on investment for their longer-term future into their extended retirement. Taken together with their albeit reduced, income from their company pension scheme, the capital value of the SIPP with its twenty or so years worth of tax-free rental income invested would be a good boost to their income later in life. They may even decide to draw on pension savings while they continue to save, under me new income drawdown rules, as well as having an annuity paid out from their mid-sixties from their ex-employers' pension schemes. Retirement need no longer be regarded as a once in a lifetime event followed by complete fiscal inactivity. Active management of some of our pension assets well into old age could be a lot of fun and financial advisers could be key in introducing people to these new possibilities.
The number of new people in the market for pensions after A-Day in the UK could be as many 10 million. That's pretty much what the government had in mind when it set out on these reforms, but they intended the new pension savers to be the 10 million or so who currently don't have company pensions. Unfortunately, I don't think there's much in this new stuff for them. I'm convinced that these new rules will appeal more to people who already have good pensions, but are becoming less certain about them.
First published in Retirement Planner, January 2005