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I’ve said before that pension reform is really about spin over substance.
Ask anyone in the street what happened in the budget and most people will answer that the Chancellor abolished annuities or removed the requirement to buy one.
But the requirement to purchase an annuity was abolished for most people by Kenneth Clarke in 1995 and the only remaining requirement (to buy one at age 75) was removed in 2011.
Indeed the budget wasn’t even about letting people have access to their pension fund when they retire. That was already in place for those with small pots of money or those who had secured an income of at least £20,000.
What the budget did do was to simplify the confusion over pensions and give everyone largely the same rights of access to their pension fund. That’s a difficult position to argue against – but I have and will continue to do so.
Not because I oppose giving people access to their money, but because I think it’s wrong that taxpayers should pay twice for someone’s retirement.
Why should taxpayers pay for tax relief on pension funds and then have to pay for pension credits to bring someone up to the minimum income level in the event of someone blowing their pension fund on a Lamborghini?
It’s easy to argue that this is unlikely to happen. After all, why would anyone that has sensibly saved all their life suddenly become reckless in old age.
I doubt that will happen. However, the point is to have safeguards for the taxpayer if it did happen.
Without safeguards it’s actually in someone’s financial interest to use up their fund, or give it away to family, and then benefit from a taxpayer funded income!
That is why the older system of full pension fund access, provided you have a secure income of £20,000, was a reasonable protection for taxpayers.
One can argue that the level was set too high – I thought it was and indeed think that the proposal to reduce it to £12,000 is still too high, as I’ll demonstrate below – but the principle was a sound one.
The government are quick to point out that they have provided a protection for the taxpayer because the new single tier pension will bring everyone above the means tested threshold.
The trouble is, that’s just not true for everyone. Anyone without 35 years worth of NI contributions or anyone that has contracted out will not qualify for the full single tier pension and, therefore, will be subject to pension tax credits if they have no other sources of income.
This leads to a very simple solution – make full and flexible access to your pension fund conditional on a guaranteed income at the single tier pension threshold.
This means that anyone with 35 years of NI contributions would have access by right and the taxpayer would be protected.
Those that didn’t have enough contributions could use their pension fund to buy them from the government, and it could be done before the deduction of tax.
This would likely be exceptionally good value, would bring forward cashflow to the government – which is one of the real reasons behind the reforms – whilst protecting the taxpayer by ensuring that everyone making use of pension flexibility has a right to a funded guaranteed minimum income.
If the government really believe what they are saying about the protection offered by the single tier pension, then this should be a no brainer for them.
It wouldn’t be a u-turn but a clarification as this policy is developed and consulted upon, but it would be vital level of protection for current and future taxpayers.
It would also stop me having to explain to my parents why I don’t fundamentally trust them with money, and who wants to be that kind of son.
No advice has been provided by Scottish Friendly. If you are in any doubt as to whether a savings or investment plan is suitable for you, you should contact a financial adviser for advice. If you do not have a financial adviser, you can get details of local financial advisers by visiting www.unbiased.co.uk. Advisers may charge for providing such advice and should confirm any cost beforehand.