By George – it’s a right mess! (guest blog by Ralph Frank)


Last week’s Budget further undermined the UK’s system of encouraging private provision towards financial security after the age of 55. Changes in relation to the Lifetime Allowance (“LA”) and consultation on the freedom to sell annuities are the latest contributors to the increased likelihood of impoverishment of future older members of society. These measures might bring short-term benefits to a few, most notably Her Majesty’s Treasury, but the long-term consequences will probably be negative for many.

The LA has been cut from £1.25 million in 2014/15 to £1 million in 2016/17. This latest cut continues a trend that commenced after the LA reached its peak of £1.8 million in 2010/11. The LA stood at £1.5 million in 2013/14, before the ‘freedom and choice’ regime in pensions was introduced in the 2014 Budget. The freedom and choice years have seen the LA cut by one-third while the private provision system has been undermined in other ways too. At least there is an end in sight to the repeated reductions to the LA, with CPI-linked increases due to start in 2018.

The Budget states (at paragraph 1.232) that “over 96% of individuals currently approaching retirement have a pension pot worth less than £1 million, so this change will affect only the wealthiest pension savers”. This is a classic example of statistics being used for support rather than illumination, much as a drunk uses a lamp-post. No attention is paid to the level of income, and the related amount of savings, required to provide a ‘reasonable’ standard of living. The 2015/16 LA will provide a lifetime income well below the level of National Average Earnings, hardly the stuff of great wealth as discussed in a previous blog, for most who are reliant on their savings. The fact that most of the population has under-provided for their retirement doesn’t mean that the rest have to be taxed into that same position too. The 96% statement is a distasteful form of populist politics. How about actually encouraging private saving by scrapping the LA?

Automatic Enrolment (“AE”) seeks to encourage private saving and has done so quite successfully to date. Over 5 million savers, who were not previously providing for their financial needs in later life, have started to make provision since AE begun to be implemented in 2012. A similar number are expected to start saving for later life by the time AE is fully in-force by 2018. These 10 million+ savers (will) have taken these first constructive steps towards financial security under a system of relative compulsion, with limited freedom and choice. Savers are included in the system unless they opt-out. Their savings are invested in a default, unless they make a conscious choice. The design of the AE system followed from extensive analysis of the prevailing financial provision landscape and the behaviour of savers (or, more accurately, non-savers). The AE system captures the lack of engagement of this group and seeks to harness this inertia for their benefit.

The freedoms announced in last year’s Budget directly contradict the principles underlying AE. There are some who are able to make constructive use of these freedoms but the bulk (perhaps more than 96%) of savers will experience little marginal benefit in reality. If anything, these savers are being placed at greater risk than before of their savings being diverted from constructive use to support their ongoing financial needs. The 2015 Budget’s objective of extending the freedoms first aired last year to those who have already purchased an annuity serves to extend the corresponding risk too. I question the need for this potential extension, the upcoming Election notwithstanding, given that Government “recognises that for most people, continuing to hold their annuity will be the right decision”. Perhaps more than 96% of people will be better served by retaining their annuity?

Many people in the UK are facing the prospect of bleak later years not because they have over-saved and/or spent their savings judiciously. Automatic Enrolment is making some inroads into addressing the former, although not to the extent that most require. The pre-freedom regime dealt with the latter, to some degree. The changes arising from the past two Budgets have created something of a mess in the UK pensions regime, sending mixed messages to savers and undermining private provision towards financial security. The reduction in the Lifetime Allowance and the potential extension of freedoms to annuitants are, to my mind, exactly the opposite of what is needed to support financial self-sufficiency for those over 55. How can Government be spurred to introduce consistent policies to encourage adequate provision towards financial security in later life?

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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