Sometimes you wonder just where the time went! This year we celebrate 25 years of SIPPs and 20 years of income drawdown.
Now, I joined Provident Life, (which became Winterthur, which became AXAWealth) in the summer of 1990 (at this point, pause to suggest that the author cannot possibly be old enough to have done this!), just after SIPPs had started and we were at the forefront of the new market.
Several years after the introduction of SIPPs the focus changed to decumulation with income drawdown being the result (well, at least until age 75 – it took until 2006 with ASP and then finally until 2011 for full income drawdown).
At the time, the thinking was very much that SIPPs needed income drawdown and income drawdown needed a SIPP.
Means to an end
It was somewhat revealing that income drawdown was not immediately the accepted name for the new option, and for a while ‘annuity deferral’ was a ready alternative.
This was very much due to the fact that income drawdown was sold as a period of deferral while waiting for an increase in annuity rates, offering the ability to defer purchase and lock in at a higher age.
This made a lot of sense but the steady fall in annuity rates and the lack of any sign of them increasing has meant annuity deferral is not the main use of income drawdown.
Income drawdown has become an end in itself as opposed to a means to an end.
Annuity purchase also reflects that annuities are pooled products with a mortality cross subsidy, meaning a higher investment return is needed to beat an annuity at later ages.
So, in 2015 we now have another event that I am sure will be the source of comment on anniversaries in the future, namely the pension freedoms. Yet again it seems to dovetail quite nicely with the two previous anniversaries.
SIPPs and drawdown took some time to bed in and I am sure that this will be the same with the pension freedoms. Ultimately though, it will be the consumer that has more choice and freedom.
Other side of the coin
Now we need to concentrate on the other side of the coin – how much can be put in and what incentives/limits exist to encourage/dissuade pension saving?
There is no doubt that tax relief is expensive and seen as being more beneficial for higher earners, but I am not sure that short-term tinkering will do much good.
We already know the proposals from the manifesto and also from the last Budget in March.
The proposals to restrict tax relief for additional higher rate tax payers would arguably save money, but the tapering proposals are overly complex and confusing and I am sure they will prove difficult and costly to administer.
From the Budget we have further tinkering with the lifetime allowance (LTA) – to me this is more of a problem.
Senior people opting out of schemes for LTA reasons does not send the right message to those who should be saving for a pension, and nor will unexpected LTA tax charges.
(About a year ago I got talking to one of the dads at my daughter’s school – he informed me that he was a senior cardiologist at the local hospital and was in the NHS pension scheme. He felt he was paying too much and was thinking of leaving. I am sure he was close to the then LTA but he had never heard of it – a potential tax charge would have tipped him over the edge!)
Let’s not forget the other logical question as to why we need a lifetime allowance and an annual allowance – the former just being a tax on investment performance!
I am not sure I have the definitive answer, but it is difficult enough to get people to save when consumption of all sorts appears more attractive and people live for today with the feeling that retirement will be all right.
Changes will always mean that people find an excuse not to save for retirement, and reduction in tax relief/LTA will be that excuse.
I also wonder about the structure of society in say 20 to 30 years (and beyond) – the demographic projections suggest more older people, fewer taxpayers, a bigger bill for the NHS/long-term care.
Should we not, therefore, be empowering people to create their own income in retirement which can then be taxed rather than having to supplement retirement incomes?
(The proposed LTA of £1,000,000 equates at current annuity rates to an income of say £27,000 p.a. which also happens to be approximately the national average earnings.)
Oh well, let’s see what happens.
In my article celebrating the 25th anniversary of pension freedoms and the associated SIPP and drawdown anniversaries we can discuss whether it has all been a success.
Mike Morrison is head of platform technical at AJ Bell