Pensions confusion could put people off saving altogether

12th May 2011

Pensions are never easy. Every attempt to ‘simplify' the rules and regulations surrounding pensions has failed and will continue to fail, as pensions are inherently complex beasts.  This lack of simplicity is not helped by an ever changing pension rulebook.

When the new annual allowance came into force on 6 April this year, many greeted the news for a sigh of relief.  Yes, at £50,000 it was significantly lower than the previous annual allowance of £255,000, but it represented a far simpler approach to restricting higher rate income tax relief than the previously suggested method of tapering relief for higher earners.

In practice, the new annual allowance is nothing but simple.  Having to calculate what, if any, unused annual allowance can be carried forward from previous tax years and placing these amounts in the correct input period results in the need for expert advice before contributions can be safely calculated.

Another change on 6 April which is proving far from simple is to the income limits for Unsecured Pensions (USP)

The introduction of a ‘flexible pension' option for USP, where investors can demonstrate a high enough level of ‘secured' pension income, was only ever going to have a niche appeal. 

As attractive as the ability to make unrestricted withdrawals from your pension pot may sound, having to pay income tax on the withdrawals is a big enough deterrent for many people to leave the funds invested.

However, having the option was always nice.  We have spoken to several high net worth investors who resent having their pension funds ‘locked up' and inaccessible during retirement, particularly when they feel that the money could be put to better use.

News that the Treasury is not allowing investors with index-linked annuity income to count this towards the £20,000 minimum income requirement is something of a blow; to both the dreams of those who wanted to exercise this option and to the dream of pension simplicity.

Several providers have suggested that this rule could mean thousands of investors are potentially caught up, although in reality it will matter for very few as the ‘flexible pension' option was always limited in scope.

The real issue here is another set of rushed pension rule changes which were not properly considered before being implemented.  Whilst I accept that the timescale between Budget and new tax year is always incredibly tight, pensions are not something that should be constantly tweaked every year. 

Considered and infrequent changes are needed to pension rules, in order to restore confidence in the system and encourage millions to save for their retirement.


Martin Bamford is a chartered financial planner at Informed Choice  

7 thoughts on “Pensions confusion could put people off saving altogether”

  1. Drf says:

    “Also sadly Portugal has repeated the Greek experience of having problems with its reported statistics.”  I fear this does not only apply to the official statistics of Greece and Portugal ?!!  The UK and EU generally come to mind as other examples, as does also the USA.

    1. Anonymous says:

      Yes, Drf, the Spanish stats certainly are miles out. They may, possibly, be accurate as far as the reported numbers are concerned, but then the government insouciantly mentions that the informal economy is a mere 24% of the total. Leaving out such a big chunk does seem to invalidate virtually all the numbers. Wealth is hugely understated, which is why Spain is not in open revolt. Oh, and Greece’s informal economy is said to be 30% of the total. Same thing.

      Getting a comparable statistical base across the EZ would seem to be the top job the Commission could do in Brussels, given the wide variety of ‘informality’ that appears to exist and the resulting hopelessness of the data.  However, I can see that it would be tricky, and deeply unpopular in political circles.

    2. Anonymous says:

      Hi Drf

      There is also a litany of problems with the numbers themselves. I plan to do an update on the use of GDP as an economic variable but if I just use the example of Portugal when I looked at her latest series of the 3 GDP measures (output,income,expenditure) there was a 4% variance.

      This cause several problems.

      1. Which one is right? ( Or of course possibly none…)

      2. In a world of discussing 0.1% moves as if Moses has just parted the Red Sea then a 4% variance on the numbers shows up such discussions for what they are.

  2. Anonymous says:

    Shaun – re Italy. Now that Berlusconi has scraped past another vote of no confidence, my thought is what this vote (and more than likely several more in this parliamentary term) will do for investor confidence in the country and the probability that further downgrades are in the offing with all the trraumas that will produce….

    1. Anonymous says:

      Hi Ray

      Yes he did and someone told me that it was his 51st in 18 years!

      Although his victory will be presented as a success by the EU etc. I could not help but think that a defeat for him would be better for Italy. There might be some short-term turmoil but after that she would have the chance to turn for the better.

      Even with ECB support the Italian government bond market struggled last week and it improved very little after the result of the confidence vote was known.

      1. Anonymous says:

        Shaun – thank you. I agree; a short-term period of turmoil could well turn the country from the brink of defeatism rather than defeat. 

  3. Anonymous says:

    A little light relief. A few weeks old but still relevant.

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