“The problem with pensions being somebody else’s problem”

20th July 2015


Winston Churchill once said “Democracy is the worst form of government, except for all the others that have been tried.”

The great man was – and is – correct in saying that our political system is probably the best of those currently available to ensure a level of equality and accountability writes Steve Herbert head of benefits strategy at Jelf Employee Benefits

Yet it does still have its problems, with a major issue being that Her Majesty’s ministers are often able to make decisions with far reaching implications for the country and its people, in the reasonably certain knowledge that, should that decision turn out to be a bad one, it will almost certainly be an S.E.P (Somebody Else’s Problem).

And this may indeed be the situation the UK faces with current pension policies.  The
Chancellor has announced a series of major and far reaching changes to the pension system in recent budgets – with the stated aim of making pension savings more attractive.

Yet this is probably not the key driving force behind these announcements.  The reality is that both Pension Freedoms (announced in 2014, and fully on-stream only a year later) and the proposed changes to tax relief will both have a marked – and potentially hugely beneficial – short-term impact on the bottom line for the Treasury.

Pension Freedoms are likely to have the effect of bringing forward the spending of retirement savings – and early indicators from insurers such as Royal London suggest that much of these valuable pension savings are being used to fund short term spending such as holidays and building a conservatory.  Both are nice to haves, neither will do much for securing the long term income needs of an increasingly ageing population.

The summer budget this year also included the proposal that “pensions could be taxed like ISA’s”, and a consultation on which pension tax relief system will apply is already in full swing.  Regardless of the eventual outcome, it seems more than likely that the eventual result will include a cutting-back on tax reliefs within UK pensions, creating billions of savings for the Treasury each year.

Taken together, these two changes may well be enough to help plug the UK’s financial black-hole in the short term – and possibly even fuel a short period of prosperity.  But is either a prudent and sensible decision for the long term financial well-being of the country?

The reality is that when the feelgood factor is long gone, these changes are likely to have undone many of the positives that Auto-Enrolment was hoping to achieve by increasing the retirement savings of the UK population.  And given that we are all living longer, and that the golden generation of Final Salary pensions is at an end, this could be an insurmountable problem by the time that reality is really appreciated and addressed.

But by then, those that have made these decisions will be firmly out of the political firing line and the fury of the electorate.  Indeed they may even be enjoying a comfortable new life in the House of Lords. And that’s the problem with the long-term nature of pensions – politically they are always an S.E.P.

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