15th January 2015
The Coalition has enjoyed a very good run on pensions but could the state pension changes prove to be an Achilles heel in the coming election asks Mindful Money editor John Lappin.
A recent freedom of information request by Hargreaves Lansdown suggests that as many as half the retiring population up to 2020 may get less than what they thought as a state pension.
Of course, up till now on pensions it has been close to plain sailing for the government. The big block buster reform is the one that means no-one will have to buy an annuity again – to quote the Chancellor George Osborne from the Budget speech last year. It shakes up the rules for how you take an income, and indeed, definitely means you won’t have to buy an annuity contract. If you want to, among other things, you can take the cash.
In fact, we are in the middle of a bonfire of the rules and regulations. You can still buy an annuity, but using the alternative – known as income drawdown i.e. staying invested and drawing an income from your investment pot – gets much easier from next April.
And you can take out all your pension money subject to whatever tax rate you may be paying that year but bear in mind that taking more pension money could push you up a tax rate. Meanwhile the rules around inheritance governing pensions and ISAs have been eased too.
Of course just this week, pensioner bonds have launched offering relatively generous rates. They may be seen as a bit of an apology given the fact that quantitative easing wreaked havoc on rates a few years back while arguably stoking inflation.
But if the bonds are a smaller piece of the jigsaw, the whole retirement income reform is strikingly popular.
The Liberal Democrat pension minister Steve Webb says people – let’s call them voters for the next four months – come up to him in the street and congratulate him on the changes.
Labour has gone along with the flow, though it wants to study the reforms 12 months in and tried to insert a requirement for such a review into the legislation. Labour may also cap the cost of income drawdown – but while pension companies may complain – that initiative at least wouldn’t hurt retirees. But intellectually Labour doesn’t like these reforms because it risks people burning through their retirement cash either by running down their investments long before the day they retire or blowing all the cash. Most experts would say a Labour-led government would never have introduced something so liberalising, so those who like the reforms may also fear that Labour will start tightening things up again.
Whether people really had to annuitise is actually beside the point; the perception has changed and people are happy they are not being told what to do with their money. There are arguments about broader society, but it’s very difficult to win such an argument on an individual basis.
So this is a vote winner for the Coalition and, definitely, for the Conservatives.
On the broader pension front – the accumulation stage in industry jargon – near universal workplace pensions have been successfully introduced as part of a cross party consensus between the Tories, Labour and Lib Dems.
Under the auto-enrolment system employers must provide access to a workplace scheme and make contributions unless a worker opts out. It is still being rolled out to smaller firms, and the required contributions have not risen to the full minimum – 4% of salary from an employee, 3% from the employer and 1% from the Government as relief. Some employers, especially smaller ones, may complain that this is a social charge being made on business and it is smaller businesses now being captured by the reform.
Yet cunningly, the reform allows opting out. This is an example of a tactic that was very trendy in government circles a few years back, known as the nudge principle. People are not forced to join a pension, they must actively decide not to join, but most are staying in. Small businesses may complain, but ministers have managed to avoid the pensions being labelled as a tax on the workforce, a label compulsory pensions would certainly have attracted.
Intriguingly, it is unclear whether there is a huge political benefit to the Coalition, but things have gone smoothly, opt outs are low, and it certainly isn’t a vote loser.
Yet both the above reforms were only two parts of the complicated pensions jigsaw. The aim was to remove a degree of means-testing, and that is on the cards, particularly around the pension credit. Policymakers also want to ‘flatten’ the next layer or component – previously known as State Earnings Related Pension, now called the State Second Pension which was tilted more towards lower earners by the last Labour Government. This second layer is now being phased out though much of what has been accrued by workers up till now will still count. But some pensioners may not be happy.
Flattening and simplifying sound good but may not be popular if it means less money in a pension. Earlier this week, Hargreaves Landown’s head of pensions research Tom McPhail published statistics the firm had received in response to a freedom of information request about the state pension changes.
The upshot is that half of retirees may not get what they thought, as reported on Mindful Money, earlier this week.
McPhail says just 45% of those retiring between 2016 and 2020 are set to receive full state pension of at least £148.40. One million pensioners in first 5 years set to receive less than 86% of new state pension. Two million retiring pensioners may be missing out on getting the full new state pension, which McPhail says they might have been led to expect by the government.
It is not quite a Nick Clegg tuition fees moment, yet this could prove to be political dynamite were it to influence the grey vote. Much of that political capital built up by the Government over pensions – and pensioners – could be lost.
But probably not this time. First it is all very complicated. So while some people will benefit, others lose out and both the winners and losers are diverse groups depending on years worked, when you retire and much more.
It doesn’t come into force properly until next year neatly missing this year’s election or indeed elections.
And finally, the Labour or UKIP opposition parties don’t yet appear to have an alternative set of proposals from which to critique the current ones. Were they to make it an issue and offer more money, then it might get interesting. But with such a fraught debate about the deficit – and when it comes to state pensions these are often very, very big numbers – it seems unlikely Labour will want to leave any more fiscal hostages to fortune.
In a way such a political argument would be very useful in the next few months, because as Tom McPhail points out, some people may expect more state pension and therefore are more likely to spend more of their private or workplace pension savings this April.
It could be quite nasty if they are using the wrong state pension baseline. Yet for the remaining months of this election cycle at least, without a headline grabbing Labour or UKIP pledge, pensions and pensioners look like safer turf for the Coalition and the Tories in particular. Then again four months is a long time in politics, especially when the election is too close to call.