My mother tells the story of my father’s plans to sail a boat around the UK when he retired. Unfortunately for my family, my father died aged 44 of cancer caused by the smoking he did during his national service. I tell that as a very personal example of the best laid plans of mice and men oft going astray.
Roll forward 40 years and medical advances may have helped people in my father’s condition but the vagaries of life can still disrupt people’s plans for retirement.
Inherent in all this planning and dreaming is the idea that the money will be there to fund things either through employment, state pension, inheritance, private pensions or other savings and investments. The plans will also assume that there won’t be those unexpected or unwanted expenditure of long term care, other medical expenses or calls on the bank of mum and dad.
Onto all of this we have to overlay the actions of government. In my lifetime I’ve paid basic rate tax at 33%, joined an employer where I had to join the pension scheme, seen three pension restructuring of the defined benefit (DB) scheme I was in for 28 years, seen national insurance extended to all earnings, had my state pension age moved, seen child benefit go from universal to a means test and I’ve still got 13 years until I get my state pension.
Why mention this? Without getting too technical it’s to do with the fact that tax relief on pension saving, the payment of a lump sum tax-free and the tax treatment of the state pension are all annual taxes. If there is no Finance Act by the end of July there is no income tax. So as sure as eggs are eggs we will have a finance bill every spring (or winter if the chancellor keeps his word).
That means that things like the taxation of state pension, the payment of death benefits from registered pension schemes, the payment of lump sums from pensions with reduced or no tax will all be reviewed annually. We all see this, as a constant stream of regular articles suggest different ways of taking tax from pensions (and pensioners) or making it more expensive for citizens to save.
Yet there will be people out there making plans based on the current rules. That in itself is a control on the politicians given Colbert’s principle of taxation being the gathering of the most feathers from the geese with the least hissing. But because income tax is an annual tax there should not be an expectation that what we have won’t change. This is especially true as we approach Brexit and a future that may have challenges we haven’t thought of and which may need funding.
Thus those with defined contribution (DC) funds or plans to amass DC funds might need to keep a weather eye on the wider political, economic and social factors. It’s not that anyone should panic, worry unduly or act precipitously, but post freedoms, post the shift away from DB, pensions are now being denominated in terms of their present value, and the amounts are not insignificant.
As a result, those planning or managing retirement, especially in a DC world or even a post pension world, might look like ‘haves’ rather than ‘have nots’, and in a system built on annual renewal might increasingly look like a suitable target. If that happened it might help to have been prepared, which demonstrates the value financial advisers can add to their client’s retirement savings strategy in this ever changing world.
Peter Hopkins is technical resources director at AJ Bell