Today’s front page headlines in the Telegraph and the Mail are the latest evolution of a narrative which began with the Budget reforms to how pension savers could access their funds in retirement.
We welcomed the reforms as good for those who were faced with the double challenges of increased longevity and very low interest rates when they came to make retirement decisions. The industry is behind these reforms, we want them to be a success and our members are working flat out to get everything ready for April 2015.
But the objective of the reforms, to give people more choice in generating income from their retirement pots in a way which works for their personal circumstances, risks being lost under a weight of rhetoric which is focussed on access to pensions savings much earlier than the vast majority of British workers plan to retire. The consequences of this if no balance is brought to the discussion, could be significant for retirees and their families, for the pension reform agenda and for future governments struggling with continued austerity and an ageing population.
Let’s look at some of the issues we face.
Pension reform is about building assets for income in retirement.
The Government has created a compulsory framework for employers which is designed to begin creating a savings culture for long term financial resilience in old age. Employers are contributing to employees’ pension pots, and incurring the costs of compliance with the new regime, to ensure that people retiring are not solely reliant on the state pension as a source of income in their retirement years. The focus on ‘cash at age 55’ raises significant doubts about the sustainability of the pension reform agenda, with consequent challenges for future UK Governments as the costs of an ageing population are felt most keenly. Automatic enrolment has seen millions more people saving for their retirement – we should be building on this success to increase their resilience in older age, not threatening this early success by breaking the link between saving and retirement completely.
At age 55 people have 30 years of active life ahead of them.
We have an environment where the state retirement age is rising, where people are being encouraged to work for longer, and where Ros Altmann was recently appointed as the UK Government’s Older Workers Business Champion. Yet the communication around the Budget reforms is focussed on access to cash at age 55.
Guidance, advice and regulation.
The regulatory rules around 'Uncrystalised Funds Pension Lump Sums' (aka ‘the pensions bank account’) and drawdown in trust-based schemes don’t exist yet. The risk to savers of making decisions without the necessary information, or the potential for scammers to become active in this market, is clear. But the prospects of the government’s guidance guarantee being able to cover the gap, or the FCA being able to develop appropriate safeguards in time for next April, are virtually nil.
Tax consequences.
The ‘news’ in today’s papers is, of course, a recycling of the Budget announcements. Only the emphasis is different. Many people will struggle to understand the tax consequences and what isn’t made clear is that, because of the vagaries of the UK tax system, tax payable on ‘early access’ will not be clear until up to a year later.
Investment in infrastructure.
If the momentum towards 'early access' continues, the prospect of the pensions sector providing long term investment fuel for economic growth is significantly diminished. Pension providers, whether trust based occupational schemes, or contract based schemes, or retirement income providers, will essentially have to be ‘liquid’ at age 55.
Social Care.
When the Budget reforms were announced, the Treasury and the DWP were clear that the flexibility created was an opportunity for product providers to create solutions for older people who wanted to make provision for their care needs. A continued focus on early access means that there will be barely enough in the pension pots of savers to cover their immediate retirement income needs, let alone to stretch to care costs in older age.
Some balance must be brought to this discussion before it’s too late.
Providers support the Budget reforms, but the impact of people rushing to take pension fund money at 55 needs to be thought through if we are all not to have to live with the consequences for a long time.
Otto Thoresen is Director General, Association of British Insurers (ABI).