For you to willingly save for your future, you need to be able to be sure you’ll benefit from saving into a pension. Sadly, the Government can’t guarantee that…even with its own pensions plans.
The pensions credit was introduced in October 2003 as a means-tested social security benefit. Its aim? To provide those age 60 and over with a minimum level of income and to give extra cash to those aged 65 and over with modest incomes from savings and pensions.
All forms of income, earnings and savings are taken into account, although the first £10,000 of savings is ignored.
However, for any savings you have over this threshold, you’re deemed as a pensioner to actually have an income of £1 a week for each £500 or part of £500 over this sum amount.
In other words, if you’ve £30,000 savings, the Government considers it as a form of income when calculating your eligibility for the pensions credit: so using the £1/week for each £500 equation, this works out as an assumed £40 a week income.
Essentially, this means that if you’ve modest savings hovering just above the £10,000 threshold, means-testing has the perverse effect of rendering you no better off than if you’d not bothered to save at all. Your savings – built up over a lifetime – simply replace means-tested benefits: the incentive to save is non-existent.
Most critically, if you’re on a low income when the new National Employment Savings Trust (NEST) account pension plans begin to be phased in from 2012, you’ll have very little way of judging whether it’s actually in your interest to bother saving into the pension. In fact, it could be worth your while to actively ‘opt out’ of the new Government plan.
Why? Because if the pension savings you build up over the years in a NEST takes you a fraction over the savings threshold, then you’ll miss out on valuable means-tested benefits – and will ultimately have saved in vain.
This is a desperate situation to be in yet, despite this uncertainty, the Department for Work and Pensions insists that workers will be better off saving in NESTs.
However, pensions economist Ros Altmann disagrees: “In the face of the state means-tested pension credit, for which nearly half of all pensioners will be eligible, a pension is no longer a ‘suitable’ investment product for many lower or middle earners,” she says.
“If you aren’t sure you won’t end up on pension credit, if you have big debts, if you don’t own your own home or if you have a broken work record, you will be at risk of losing between 40 per cent and 100 per cent of any pension income you receive.”
And if that’s you, she says, a cash ISA is safer than a pension since the pension is a ‘locked box’ which you have to convert to an annuity – or income for life in return for your ‘defined-contribution’ pension pot – at retirement.
Why? Because, she adds, “an ISA can be spent if it will end up being penalised by the means test. Mass means-testing of pensioners undermines the suitability of pension saving.”
Here’s a huge joke at your expense: pension reforms introduced in April 2006 were comically known as ‘pension simplification’ but ended up being dubbed ‘pension complification’.
For the average man in the street, the baffling welter of change meant very little unless you were a high earner and were prepared to take up the reins of a self-invested personal pension (SIPP).
First, rather than encourage general saving, the reforms largely helped the wealthy to better plan for retirement. For example, they allow workers to now invest up to 100% of their earned income in any tax year – up to today’s ceiling of £245,000 – and receive tax relief at their highest marginal rate.
Then complexity edged in, with a new lifetime allowance (LTA) – also aimed at the very wealthy – set at £1.75 million for 2009/10 tax year and £1.8 million for 2010/11 to 2015/16. So if your overall pension savings exceed this threshold, you may be hit by a 25% charge if you take the additional savings as a pension, or a charge as high as 55% if you take it as a lump sum.
Rules about when you can take your pension also shifted. By 6 April 2010, every pension scheme must have an age limit of at least 55 – instead of 50 – and you must start taking your pension by 75 although – rather aptly for ‘complification’ – there are ways to sidestep such direct action.
The Government has also backtracked several times on various aspects of the original reforms for Self Invested Personal Pensions (Sipps), withdrawing original plans to allow you to invest in residential property and exotic investments such as art, wine and even vintage cars.
On top of this, if you want to bequeath your pension fund to anyone other than your spouse (if you die after the age of 75), you’ll find your fund taxed at a walloping 82 per cent – leaving a paltry 18 per cent left to be passed to your estate.
And for higher earners, it’s just got a whole lot worse. Astonishingly, in the 2009 Budget, the Government added yet another layer of complexity to the pension rules.
Originally, it had been planned that – from April 2011 – if you earn more than £150,000, you’d see the tax relief on your pensions reduced, tapering from 40 per cent to just 20 per cent if you’re lucky enough to take home more than £180,000.
However, that’s not all. The PBR has now ushered in a feverishly new complexity where the above rule will also apply to you if your gross income is more than £150,000 where – crucially – this also includes contributions to your pension by your employer.
In essence, it means that if you earn between £130,000 and £150,000, you could also be trapped by the new rules.
Crucially, this follows hard on the heels of earlier so-called ‘anti-forestalling’ measures proposed earlier this year. Yet another hideously complicated layer of legislation, this is a de facto bid to try to stop those on more than £150,000 from injecting pension saving top-ups of more than £30,000 a year, before new punitive tax rules come into force in 2011.