he wanted government decisions on tax and other policy areas to deliver “higher levels of confidence, investment, profit for British businesses”, adding that financial services were not seen widely enough as “the foundation and engine of greater investment and therefore potential growth in this country”.
This meant moving beyond the “post-financial crash obsession with regulating for risk”, he said, arguing for a better balance between risk and growth.
This is the ambition stated by our new Chancellor and it should send a tremor though the pension world which has been dominated for the last 20 years by an obsessions with “de-risking”. The obsession has concentrated on the process of de-risking pension risk to a point that we no longer provide pensions but instead hand over pots. This is not “de-risking” but risk transfer to those who are least able to take it.
No longer investment , “pensions” are now just taxation
Since the risk of paying pensions has been minimised to it, the employer is instead obliged to pay what has become a tax. Auto-enrolment contributions are taxes that are paid into a a few wealth funds which are called “workplace pensions” but which pay pots but no pensions to their beneficiaries (the staff).
The risk of paying back the money accumulated to those saved is no longer with employers. To retune to John Healy’s quote, the job of regulating for risk has been completed and it has driven us down a cul-de-sac out of which we need to reverse.
It will not be the employers risk , it will be shared between staff in collective pensions. The task for private sectors employers will be to participate in collective pensions and fund them to levels needed to meet staff’s expectations.
De-risking has become an obsession with protecting wealth
Those who have regulatory power or influence are generally in DB pensions , being in the public sector. They get to hear the private sector through the ABI and Pensions UK who have an obsession with protecting the wealth of those they represent.
With the focus on retirement saving about pots , there is a new obsession, on how to protect it from being taxed when it passes to another generation.
…. from next April, pensions will come within the scope of IHT, significantly increasing the number of people who will have to pay the tax — and sending feelings of both dismay and fear through those who have built large pots.
According to Clare Moffat, a pensions and tax expert at Royal London, IHT is now almost all her clients want to talk about. At a recent webinar the pension provider held, the panel received 56 questions on IHT submitted in advance. “And we weren’t supposed to be covering it as a [subject],” she says.
The problem with wealth as a risk is threefold.
- We are as a nation getting older
- We are getting more wealthy
- We see retirement not as a time to draw a pension but to save for others
But the people who are making the noise about inheritance are vocal but few, when compared with what Bernard Levin used to call “the silent majority”.
For those who have inherited money. a house with mortgage paid off and often a pension accrued in early days, the risk is that wealth may not “cascade down the generations” as John Major dreamed when prime minister.
The important thing for Andy Burnham, John Healy and Torsten Bell is to ignore the loud voices of the wealthy and focus on the needs of this silent majority who will not have adequate pensions – there’s 15m of them who have no fear of inheritance tax but the prospect of a massive wage cut in retirement with the financial horror of later age when the cost of social care is most likely to bite.
While Reform and Conservative parties battle with each other as to how much to reduce welfare bills (a further extension of regulatory risk-reduction). It is of course not risk reduction but of risk-transfer with no obvious opportunity for those who have limited wealth or income to pay the bills.
This is why we need to focus pensions not on the needs of the 20% who have issues with inheritance tax but the 80% who have inadequate resource to meet the needs of their own later life.
Answers for the rich and poor
The answers to problems with IHT for the wealthy can be resolved through whole of life insurance or through the purchase of an impaired life annuity (the choice depends on whether the worry is living too short or dying unexpectedly when healthy).
The problems of adequacy can only be sorted by a replacement of a focus on wealth with one of the retirement wage. It will of course need more money paid in but this cannot happen till private pensions become popular again. There is silent approval of the pensions earned in the public sector and private misery that there are no private pensions being earned. That is because of the de-risking of pensions to the point that they are no longer being earned by most of us.
We need to make “pensions” popular again and that means a move to collective pensions and away from personal pension pots. For a generation who are at a point when they could take a pension (let’s say those 55 to 75), the question is when moving to retirement income is possible and the pension dashboard will go some way towards helping people recognise how far they are from reducing or ending work.
But we will need Retirement CDC and Guided Retirement to move people to affordable retirement when they are pot-dependent. The annuity guarantee will be de-risking too far for most of us.
The workplace collective pension (CDC) will begin the process or re-risking pensions to a point that they can grow enough to meet John Healy’s ambition and reduce regulatory de-risking”.
Pensions have been de-risked to pots by regulation and as Healy says we need to move beyond the obsession with this regulatory risk.
We need to re-risk pension funds to create the growth that people need to get paid a proper wage and the country to be re-capitalised.
It will take a time to undo the damage of regulatory de-risking . But we have a much wider workforce who can get a retirement wage. We have greater inclusion in future pensions and a chance to do what the Pensions Commission II has been set up to promote.
Does anyone know how much has been lost to the UK Economy by the transfer of DB Pension Scheme assets to the increasingly overseas owned insurance companies through excessively profitable “risk transfer” transactions over the past 10 years?
Resources that could now be being used to support the sponsoring companies.
LDI losses ever quantified?
I notice that the old back to back annuity/whole life solution mentioned but it is not so easy today
Whole of life premiums paid to provide a capital sum to be used by children to pay some of the IHT is very limited and needs quanifying and records meticulously kept.
Essentially to you must keep records of the gifts made.
Keep records of your income as well as you need to demonstrate how the standard of living was not diminished
Keep records of your spending pattern (how otherwise will your PR claim that regular gifts were out of income that did not diminish your standard of living
Use HMRC form IHT 403 or you can make your own record-keeping form up, Better to use the HMRC detailed document yours may be absolutely brilliant. Of course, I’m sure it will be. But there is an HMRC template, with a detailed schedule which can be used to log gifts as they are made.
Gifts can only be made out of surplus INCOME otherwise you are limited to £3000 pa What sum assured will this buy?
Have a look at the form and think about how your PR will make the argument.
In the states, we have a whole industry that has been created to moderate the tax on retirement savings. Typically, it involves conversion of tax deferred monies in retirement savings plans to “after-tax” Roth monies – where, after converting and paying the income taxes associated with the monies, the earnings on Roth assets often come out tax free.
In the states, passing money to a surviving spouse is typically without tax effect.
However, concentrate too much wealth, or pension income in a single spouse, and you have what some call the “widow’s tax”, which often shifts the surviving spouse into a dramatically higher federal AND state marginal income tax bracket.
So, people with significant accumulations of retirement wealth may be advised to consider periodically converting tax deferred monies by paying the taxes today as part of a Roth conversion – starting as early as age 59 1/2. Required minimum distributions from tax deferred savings must generally start at age 73, or age 75 for those born on or after 1/1/60. And, once the surviving spouse dies, the surviving child(ren) only has 10 years to take distributions – where, unless those are Roth assets, they will be taxed at the child’s highest marginal rate (federal and state).
If I were “king”, I would encourage you to exempt the New State Pension from IHT (if it already isn’t) and to allow individuals to take steps beyond purchasing additional qualifying years, enabling them to pay a premium to “super top up” the benefit. This would incent individuals to purchase a state pension (“investing” in the UK), which would automatically come with a surviving spouse benefit – continuation of the same amount, perhaps indexed for inflation, and perhaps a death benefit should both the individual and spouse die prematurely before recovering the premium paid.
There are great actuaries in the UK – I am sure they could properly price the benefit, and, as necessary, incorporate a margin for antiselection.
We can achieve a variation of this in the states by using accumulated savings as a “bridge” to defer commencement of Social Security to age 70. So, say your Social Security Full Retirement Age is 67 and that you stop working at age 62. Say your Social Security benefit at age 67 is $4,000 a month (retiree and spouse). Instead of that $4,000 commencing at age 67, you could claim $2,800 starting at age 62 or $4,960 starting at age 70. The “bridge” would defer commencement to age 67 by taking out $4,000+/month until age 67, or $5,000/month until age 70. To that, you would add a second “bridge” amount equal to the projected required minimum distribution commencing at age 73 or 75, as appropriate.
My understanding is that the 2026/27 tax year the maximum annual benefit amounts to £12 547.60 or £241.30 per week. Why not let people “buy” more if they are so worried about IHT?
Oh, by the way, in the states, the exemption for federal estate and gift taxes is $15MM per person, $30MM per couple, then 40% on amounts in excess of that level.
The annual gift tax exclusion is $19,000 PER RECIPIENT per year, meaning you can gift this amount to anyone without it counting against your lifetime $15 million limit
My spouse and I have both been making maximum annual gifts excluded from the gift and estate tax to each of our children for a number of years.
As some Americans learned from Ben Franklin’s 200+ years of experience with legacy gifts, better to have given away money while living, when you are in control, than to leave it to government (or quasi government) entities.
See: Ben Franklin’s last bet. https://www.harpercollins.com/products/benjamin-franklins-last-bet-michael-meyer?variant=40828366028834
For DC pots alone (workplace pensions, SIPPs, personal pensions — excluding DB), the picture is much smaller: the average UK pension pot for someone aged 64 is around £107,300, and some analyses put the median DC pot at retirement closer to just tens of thousands of pounds.
So at the £4000 per month drawdown with an 8% growth rate the plan not only fails to keep up with inflation but is exhausted in 30 months because it only has £107,000 at age 67 A comfortable joint life income would need £800,000 -£1,000,000
We have known this for many years and if you get to 7 figures then the winging poms will treat you as rich and greedy when in reality we just bought an HP12c and acted on the math.