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Pensioners get jolt back to reality

2nd April 2017

As an April Fool’s joke yesterday, we reported here at Holborn Assets that the UK Government was, instead of taxing pensioners, making pensioners into millionaires, left, right and centre.

We wish it were true.

Pensioners - multi generation family playing soccer together

But the truth is that pensions are not only so tax-sensitive, but so varied nowadays, that professional help is the only way to navigate a retirement safely. You could probably say the same of many areas of personal finance, with product proliferation always accelerating; in the way of retirement options, from trusts to pensions, holidays to care homes, there is simply too much to choose from; and too much at stake.

With pensions, there are the life savings of families on the line – so what could be more important than to pick your financial products with care? Here at Holborn Assets, we urge you to use a professional adviser for your retirement planning, however you proceed.

Is the UK pensions landscape really that bad?

On the plus side:

Improved Pension Advice Allowance
The UK Government in early 2017 tripled the amount of money you can use from your pension pot to pay for professional retirement planning advice.

The Pension Protection Fund (PPF) stands firm for DB schemes
The PPF is more active than many consumers with workplace pensions realise in providing real financial compensation every year. In 2016 the Fund made payouts totalling £616m – that’s over half a billion pounds – to approximately 120,000 members.

Pension Scammer Loopholes sewn up
In December 2016, the UK Government announced moves to crack down on pension scammers, including the banning of cold calling regarding pensions and making it simpler for pension executives to stop suspicious transfers going through and losing clients their money.

On the negative side:

For DB pension holders
A government consultation paper published by the Department of Work and Pensions suggested – as just one of many options on the table – that a company might in the future be allowed to waive annual employer contribution increases if to do so would give it financial leeway vital for its survival. That would mean that pension holders in future might (and it’s a long-shot at the moment) be left with a pension that won’t be rising in value with inflation; in fact, not rising in value at all.

Lifetime Allowance scaling down
The Lifetime Allowance is a benchmark which shows how much of your pension pot as a UK citizen can be retrieved without paying additional taxation.

The Lifetime Allowance has been reducing over the years whilst inflation has been rising – and, as consumers, we want it to be trending the other way:

  • 2012 Lifetime Allowance: £1.8m to £1.5m
  • 2014 Lifetime Allowance: £1.5m to £1.25m
  • 2016 Lifetime Allowance: £1.25m to £1.00m

New (Q)ROPS tax of 25%
The 2017 budget saw a 25% tax slapped on international pension transfers using the Registered Overseas Pension Scheme (formerly known as the Qualified Registered Overseas Pension Scheme) across many jurisdictions. This legislation has limited some options for expats, but a range of cost-effective strategies remain open for expats to move UK pensions abroad; brokers like Holborn Assets will always be the first to know as the market develops new and leaner product solutions.

The gender gap is alive and kicking
Women save less for retirement than men and say they are less confident with investment market, although the need, research suggests, for women to save is greater because less pension contributions are made every year by employers to women.

In March 2017 YouGov research, 15% more men than women agreed with the statement that, “overall, I have a sufficient level of financial knowledge to feel comfortable investing my money.” And almost twice as many men and women said that they had invested in capital markets (men: 31% – women: 17%).

Dr. Ella Rabener, founder of Scalable Capital and commissioner of the research findings, explained that, “the reasons for the different investment behavior of men and women are the unequal financial resources at their disposal and the – at least perceived – lack of financial knowledge of women.”

Confirming that women get a tougher pension deal from employers have been findings from the influential Zurich Workplace Savings Barometer which found that, between 2013 and 2016, employers paid women a workplace pension contribution that was, on average, 0.7% less than what they paid men.

And what about the triple-lock?
There is currently talk of the triple-lock being under threat. The triple-lock mechanism guarantees an annual rise in state pension of at least 2.5%, but November 2016 findings from the Work and Pensions Select Committee that, to pay for this continued rise, the State Pension Age (SPA) will need to be put up to just over 70 years old by 2060.

The State Pension Age (SPA) is in 2017, 65 for men, and 63 for women.

Perhaps most worryingly of all …

The UK rates as number 11 compared to 25 other global pension systems, according to the 2016 Melbourne Mercer Global Pensions Index. This rating doesn’t sound too bad, until you read Mercer’s observation that, “the UK received a ‘C+’ grade with a score of 60.1 out of 100, down from a B grade 65.0 in 2015. This grade indicates that although there are positive features present, the system also contains major risks and/or shortcomings that need to be addressed.”

And when it comes to iterating the “major risks” of the UK pensions landscape, where do you start? With the giant “pensions deficit” with a value that expands worryingly by a couple of hundred of million pounds every time it gets mentioned? Or with the phasing out of DB schemes? Maybe begin with the continued vulnerability of retirement planning to onerous taxation without professional legal advice on your side?

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Are things so bad we should ditch the pension and save only in bricks and mortar?

In August 2016, Andy Haldane, Chief Economist to the Bank of England, controversially suggested that, when it comes to our best bet as UK citizens for retirement planning, “it ought to be pension but it’s almost certainly property.”

Haldane suggested earlier in May 2016 that the pension system was simply too complicated for normal people to understand – and, what’s more, that the so-called experts didn’t have a clue either.

In the property vs. pension debate, Haldane points to the structural advantage that property has as an alternative to a pension as a lifetime investment:
“as long as we continue not to build anything like as many houses in this country as we need to … we will see what we’ve had for the better part of a generation, which is house prices relentlessly heading north.”

House building in the UK does, indeed, lack drastically behind target. And this can only support a buoyant market.

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