As an independent financial advisor I would hope I understand the differing levels of wealth amongst different age ranges in the UK. It’s very clear the next couple of years are going to be interesting. You will always hear the words “uncertainty” and “challenging” used by politicians. Let’s be honest, it’s impossible to name a period in the UK where there hasn’t been challenges or uncertainty. It seems to be the same words repeated by different politicians.
Whilst the markets have flown since the 24th June 2016 the underlying economy for the next decade will be determined by future negotiations and agreements secured between now and 2020. The success or failure of Brexit will sit firmly with the Conservatives and determine whether they remain as the government beyond 2020.
On that basis, there is no more an important politician than the new Chancellor Philip Hammond. This was a man that sat in the “remain camp” and argued that Brexit would make us poorer. The irony now being that he needs to make sure that doesn’t happen!
Bold decisions need to be made especially given the Bank of England has very little manoeuvre with monetary policy. Down to you Mr Hammond.
These are the 4 pension areas that should be written in big bold letters on each of the walls in his office.
Triple Lock Pension – a long preserved benefit for those receiving State Pension that increases the pension by the lesser of CPI, National Average Earnings or 2.5%. This will cost the government an estimated £8bn in 2017 and could rise beyond £10bn a year come 2020. A combination of deteriorating public finances and people living longer mean this long unaffordable guarantee has to go. When you consider many over the age of 65 are living in a golden era of pensions having received final salary pensions and for some, State Pensions since the age of 60, there has to be some rebalance of wealth to those under the age of 40 that are struggling with debt, student costs and buying a first home. This isn’t me bashing those over age 60-65. Nobody would disagree that all the pensions are deserved but at a time when government debt sits at £1.4trillion, we can either continue to pay these increases with the net effect of State Pension moving to beyond 70 for most, and the NHS falling apart, or we can apportion the funds to other much needed areas. A brave decision to alienate your core voter group but something that needs to be done.
Tax Relief – there has been speculation during the last 2-3 budgets that tax relief is going to be altered. At present, basic rate taxpayers get 20% tax relief on pension contributions. For every £100 that goes into your pension, the cost to you as a basic rate taxpayer is £80. Higher rate taxpayers receive 40% tax relief which means the same £100 costs £60. The aim for most is you put money in with the tax relief and take it out without tax or the lowest amount of tax possible. The government is already consulting on the Lifetime ISA to sit alongside pensions. A complete removal of tax relief on the way into pensions would mean the government would need to remove tax on the way out. A great way to make the pension system simple and would still be an attractive option for many as inheritance tax free. My view is you do need to incentivise pension saving with tax relief as nobody really knows what the State Pensions will look like in 40 years’ time. There have been lots of strange ideas on tiered tax relief systems based on age but understanding this and more importantly administering this would be a nightmare. The government seem to be on the right path with this and it was widely predicted a flat rate 30% tax relief was in the pipeline under George Osborne. Let’s see it Philip follows it through as it certainly makes sense to me.
Final Salary Pensions – As a pension specialist offering advice on final salary pensions I can honestly say this is a ticking time-bomb. My previous articles have highlighted the financial burden now strangling companies with the UK defined benefit (final salary) at nearly £1 trillion. This is the total shortfall across all final salary schemes. The use of quantitative easing, devaluing of the £, falling gilt yields, financial salary pension increases linked to RPI and incompetent trustee investment management are just a few of the factors that have pushed deficit levels up to this figure. This is the tip of the iceberg as deficits are expected to continue to rise. If you throw in the mix a couple of years of poor investment returns which is entirely feasible and we will hundreds of schemes collapse between now and 2020. Let’s hope the new Pensions Minister has this high on his agenda as unfortunately the recent TATA and BHS pension scheme debacles will become common place. We need people to believe in the pension they have and what it will provide in years to come.
The Pension Minister Role – It would be a huge benefit to the UK to empower someone in the role that actually understands pensions, the needs of pension savers and the pension industry. I don’t think I’d be over stepping the mark in saying Steve Webb was probably the one MP that made a real difference. Great hope was placed on Ros Altmann, with 30years financial services experience in a range of roles, but unfortunately she delivered very little and disappointed many who had such high expectations. The new Secretary of State for Work and Pensions is Damien Green. Having completed the department rounds from Education, Transport and Immigration it seems the obvious and natural step into the Pensions Department especially given his background as a journalist and speechwriter! The sceptic in me doesn’t hold out much hope that the things that need doing, actually get done. I hope I’m wrong!
With the markets at an all-time high, a very interesting 2017 on the horizon and final salary schemes undoubtedly needing ongoing advice, talk to your advisor as often as possible. If you don’t have one, the time is now.
Paul Barnes is a pensions and retirement specialist with PDB Wealth Management Ltd.
You can contact him at firstname.lastname@example.org or 02920 451311 to ask any pension related questions.
Paul Barnes DipPFS
Financial Planning Consultant
PDB Wealth Management Ltd
Independent Financial Advisers
Mob – 07917 160021
Tel – 02920 451311
Fax – 02920 090600