For the majority of people, the simple rules of saving early, saving hard and being patient apply. The savings agenda can’t be dominated by fear of penal taxation on those with high earnings and wealth. https://t.co/rpfzJ86uX4
— Henry Tapper (@henryhtapper) February 18, 2022
I watched Martin Lewis’ pension edition of his Money Show last night with a mix of admiration and disappointment.
I admired Martin and his panellists, eloquence, precision and passion, but I was disappointed in finding myself struggling to keep up with what were pension basics. As my partner, who was chair of the PMI examiners, said to me – “it didn’t exactly make pensions easy..”
It didn’t because they aren’t, which is why so little is said by Martin about the things that drive successful pensions – investment – pooling and 20%+ contribution rates. These aren’t things within the compass of those saving through workplace pensions, who form the majority of his audience. Successful pensions, measured by their capacity to deliver meaningful replacement of final or average salary, are in short supply and what is left to us, is the promise of free money from the taxman and employer to boost what otherwise would have gone into cash ISAs or deposit accounts.
For many of the 10m new retirement savers who Martin was addressing, the message was “don’t opt-out, do opt-in”. This is a good message, especially as the tax advantages to those with small pots are savagely good (most won’t save enough to pay tax and their biggest worry is preserving their right to pension credit and other benefits which can be wiped by drawing the pension pot in the wrong way. That’s real world economics.
Which brings me back to the tweet exchange with the admirable Steve Glennon (top accountant, top man). Steve was responding to my blog on the opportunities for those in the public sector to top up their pension rights, he’s right to highlight the issues for high earners and those with long service for whom this may not be a good idea.
It is extraordinarily easy to blight a simple concept like topping up your pensions with tax-subsidised AVCs, because of the risk of penal taxation on the benefits arising. But to do so is madness. Just as stopping low-earners is madness because many overpay their contributions by 25% or get caught in a means-tested benefit trap on benefits arising. We cannot allow the exceptions dictate the agenda!
And whether you are an accountant or an IFA or a lawyer or a regulator, you must accept that there will be bad outcomes arising from well intentioned policy, or advice, which arise because of changes in circumstance. How (for instance) do you explain the tax implications of a pension contribution to someone on the margin of a tax-band, when you don’t know if the contribution will get a 20 or 40% tax rebate? It’s one of those “it depends” – where the decision is ultimately about alternatives (investing, spending, paying down debt or simply banking salary).
And notice the word that comes to my mind when I talk of contributing to a pension . It’s a word that Martin Lewis is very familiar with and very fearful of – “investing“.
Martin did refer to saving for retirement as “investing“, but if you look at the faces of those who he is addressing on the video-clip above, you can see how sceptical many ordinary savers are of giving money to people who “invest” it.
This is the biggest achievement (so far) of auto-enrollment, it has finally realised the Thatcherite dream of turning Britain into a nation of owners in UK PLC. (Well maybe more overseas equity, but that may change). The people in that video may not know their retirement money is invested in UK and world markets, but it is.
And what if the world markets did crash, as they nearly did in 2008? What if those investments were virtually worthless? Would we then be saying that people should never have saved? There are risks which cannot be insured, because they are so systemic that the risks would wipe the insurers too!
Which brings me back to Steve Glennon’s tweet and my response. I was very struck by a presentation made by Steve Webb in early December last year. Steve’s thrust was that pensions are a lot more about the state pension than pension experts generally admit and that the things that bother pension experts tend to be “first world problems” associated with earning too much or having too much wealth.
That is spot on, even for public sector pensions, which give people the chance to be part of a successful pension (see above) for little more than minimum auto-enrolment contributions.
My message to those who are in public sector pension schemes is to ram home their advantage
Paying Class 3 NICS doesn’t impact your AA or LTA. AVCs should be paid where there is headroom. The vast majority of public sector employees have headroom. Those who are worried should model before they meddle, if still worried they should seek advice. https://t.co/RAW2kBTNo4
— Henry Tapper (@henryhtapper) February 17, 2022
My message to those who run workplace pensions is to use everything at your disposal, your capacity to pool investments, longevity risk and your marketing capacity to increase contributions; – to give better value for money on the investments your savers make.
We have a two-tier workplace pension system that can broadly be described as public sector and private sector. Some people in the private sector may be paying more towards public sector pensions than into their own such are the oddities of our taxation system. But the oddities do not mean that pensions are bad, they just mean that pensions are odd- sometimes!
Let’s encourage weak workplace pensions to aspire to be best, not level the best by limiting their outcomes.
And oh that we could all look at life with the charm and grace of these two!
— Ian at Money Alive (@MyMoneyAlive) February 18, 2022
Having a sense of humour about these things is important, as it gives us a sense of perspective. The broader perspective needed , looks beyond the problems with the AA, LTA and MPAA and addresses the bigger question of how we make the most of the great possibilities of retirement. A key lever in creating the retirement we want are the tax-incentivised pension savings plans available to us and nowhere are the tax-incentives for saving greater than for those in public sector pensions.