AgeWage: Making your money work as hard as you do

This article is wrong as Scott Bamber says.

But it is written a few weeks before a budget in late October where a Government has little room to spend on defence and housing and the regions within the fiscal rules. Tax relief on pension contributions floundered in the past because a simple way for high earners to get round the issue was to duck pension contributions altogether and use sacrifice salary to get paid by pension.

From April 2029, pension salary sacrifice will be gone for all but a small amount of income which is of little importance to the higher-rate tax payers (especially those getting relief at 45%)

Now that it can only be done on £2,000 of income ,  higher contributions are more vulnerable, especially if the concept of the non- contributory pension scheme is abolished and everyone has to from salary to be in a workplace arrangement, It is easy to see this policed by TPR using a revision of the AE rules.

I like Scott Bamber’s post because he is young enough to have some skin in the game, He’s successful enough to be affected by abolishing tax-relief for high earners. Good on you Scott. Thanks too to the author, Philp Inman, a senior journalist.

The philosophical  argument made by Philip Inman is that Pensions no longer do what they were supposed to do. This is true but we have a Labour Government has made a lot of changes to how pensions will work for people.

In future, people will not benefit to a great degree from salary sacrifice, will not shelter inheritances in pension pots and will have to opt-out of default incomes from CDC R-CDC and Guided Retirement. Pension Freedom is not what it has become – or won’t be shortly.

I thoroughly agree with this move by this Government. Pensions should provide a wage in retirement for workers as a means of keeping a workforce from cradle to grave. There are a few private employers that still do this and they include the Railway employers, Universities and Royal Mail.

These are where collective pensions still operate and by and large they are multi-employer with employees moving from one participant to another. In the public sector there is the funded LGPS which again is multi-employer, the Royal Mail is to my knowledge unique in having gone to collective pensions.

Collective pensions are likely to survive as most useful for low and middle earners who do not aspire to wealth, to pots and to having advisers. I am not sure that “pensions” are coveted by most higher rate tax-payers, though they are a much part of the workforce than they used to be.

So I think that pensions (rather than DC pot-savers) could survive the loss of high earner’s who have had their pension contributions capped for some time now. I am sure there would be opting out because they did not get higher rate tax relief.

What would be the loss to the higher-rate tax payer? I suspect there would be howls of anguish from the ABI and Pensions UK but do they really stand for the bulk of members contributing?

If you think the way of unions and many Labour politicians , it is time that pensions returned to their philosophical home ground. Losing tax-relief would poster in big letters the message of the Pension Commission first report, that pensions will in future focus on the 15m who haven’t got enough as a retirement income.

I suspect that it would change pensions from being a route to becoming wealthy to a means of getting deferred pay. Pay does not  generally attract higher rate income tax ;  it appears to go unspent by the rich becoming  a means of IHT payment for those inheritances that are in seven figures.

I think it wrong to blame the rich for ripping off the poor though it may have happened. As Inman points out, we are far enough away from open private sector DB plans for them to be an aspiration among unions, they are seeing collective pensions in a different way. One of the problems with DB plans was that the vast majority of the funding was obscure and far from the transparency of defined contributions. “DC” could become a lot less complicated if it was standardised to a single tax rate on employee payments and a standardised balance between employer and employee contributions

It was always that the “executive section” of a corporate pension gave outrageously attractive terms. Professionals could use S226 individual pensions that were designed for the rich. It is not the fault of one generation of rich people, it is inter-generational- the rich have always enjoyed the bulk of the benefit of  pensions, not least because they live so much longer than the blue-collared workforce.

I have read about avaricious union pension officers who have found ways to line their pockets but if it has happened, I don’t think it is important in today’s argument. What is important that having done away with salary sacrifice and made wealth management with pension pots a lot less attractive, it may be possible now to put an end to higher rate tax relief.

John Healy would save a lot of money and Treasury taxation bombshells (such as the pension freedoms) do not  require consultation. Finance Acts are enacted very quickly.

We could see the impact of the savings within the scope of this Government meaning that some of the spending that Healy and Burnham want to do could happen without hurting the silent majority who still don’t pay higher rate tax pay – or get a proper pension.

I cannot go to this event and would be out of my depth if I did.

But I can see the issues that are being discussed and wonder if open DB schemes such as USS have markedly different issues than those that will face trustees of CDC schemes going forwards.

Indeed it seems likely that DB schemes will have CDC features built into them. Haven’t USS been talking about increases paid contingent on performance of underlying assets in the fund?

I would hope that in due course Collective Pensions will be considered as including DB pensions and CDC schemes, especially when both are whole of Life and open for future accrual.

Shouldn’t CFOs, Heads of Pensions , Finance Directors and Trustees of DB and collective pension plans share the same interests?

This is a question to Emma Pittaway and other professionals working in this area. It is important that we do not let pensions become compartmented.

I hope that Emma and those at Bufdg will accept this as a compliment of their work.

The real reason why delegations from UK commercial pension scheme set off to Australia so frequently is they’re looking for reasons why the UK Government should adopt the means tested “age pension”.

The answer is simple and good reading if you run a workplace savings plan – like master trust or group personal pension

Yes, rather than lean on the Australian taxation system, Super, which needs no incentivisation (it is compulsory) is relieving the Australian tax-payer of State Pension liabilities. Here it is spelt out by Penny Pryce.

Australians are relying less on the age pension to fund their retirement as their super balances grow, according to Association of Superannuation Funds of Australia (ASFA) research.

The study revealed about 56 per cent of people aged 65 or over now receive a full or part age pension compared to 70 per cent in 2012.

Average superannuation balances for people aged over 15 were $202,644 for men and $164,206 for women in 2023/24, up from $192,119 and $154,641 in the previous financial year.

Super has three things going for it if you want it in the UK

1. It is compulsory with a contribution rate at the 12% the Pension UK want for UK savers
2. It is an easy sell to a welfare cutting government as justification for cutting state pension and eventually means testing it
3. It offers “balances” which like our “pots” offers wealth management opportunities (not yet pensions)

Australians are very proud of themselves for having de-risked the state of a DB pension through a well funded DC pension system, above expected returns on Super investments and agreement from all parties (employers, unions and Government) that this is good news for Australia. Here is Penny’s verdict.

As more people reach retirement having had the benefit of double-digit compulsory super for most of their lives, we’ll see the system come to full maturity, with most retirees living on an income well above what Centrelink can sustainably provide as our population ages.”

Treasury’s “Retirement Income Review Final Report” predicts the proportion of people over 67 receiving either a full or part age pension will drop to 50 per cent by 2059.

At 2.3 per cent of gross domestic product (GDP), Australia has one of the lowest public pension expenditures among Organisation for Economic Co-operation and Development countries, where the average is around 9 per cent. Expenditure in Australia is also expected to experience a 2 per cent GDP drop over the next 40 years as superannuation balances grow.

“The system maturing means that we are constantly seeing Australians taking a step up, either from the full pension to a part pension, or from a part pension to being able to fully fund their own retirement through their savings,” a spokesman said.

The idea of needing a state pension as a kind of financial weakness is implied here.  The prospect of getting no payment from the state being seen as an achievement.

Over a decade ago, our Government Actuary suggested that we might be able to dispense with our triple lock if auto-enrolment was a success. There was an expectation not that we’d do away with the need for state pension but that we could reduce pension increases.

I can understand how our private sector pension policy people would like to get aspects of the Australian Super system into the UK but I don’t think that we have a view of the state pension or of compulsory DC savings contributions that are popular in Australia.

I don’t expect to see a Labour Government and our unions having the same attitude to either DC saving or to means testing of our state pension.

John Healey has told the FT

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.

The FT observes.

…. 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.

1. We are as a nation getting older
2. We are getting more wealthy
3. 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.