It’s hard to believe now, but when I started as an adviser in the early 80s there was no regulation. Looking back, it was a Wild West for advisers and product specialists. Commissions and fees from both alike were horrendous.
I remember trying to take out a private pension for myself. The charges were totally opaque (which I soon learned meant very expensive). For most, if not all, of the first two years, premiums went out entirely as commission. Advisers often dressed up single premiums as regular ones, as it paid them way more – to the detriment of the client.
I’m glad to see so much has changed for the better since then.
Former chancellor Nigel Lawson’s introduction in his Budget paved the way, I think. Suddenly, pensions were shown for what they were. Investment products and SIPPs allowed you a full range, no longer being tied to a poor-performing life fund. Technology also came to the rescue of SIPPs, allowing much smaller contributions to be economical.
While the financial-services industry has largely got its act together, successive governments have made long-term pension planning hugely more complicated
So, fast forward to this century, pensions must surely be a success story. Not so fast. For me, it’s been nicely encapsulated by this quote from Alan Smith, CEO of Capital Asset Management, an advice firm I expect many of you will know:
“Your pension pot is now subject to IHT.
Before this change it wasn’t.
But you no longer have a Lifetime Allowance.
But before you did.
And before that you didn’t.
You now have an Annual Allowance.
But before that you didn’t.
But before that you did.”
So while the financial-services industry has largely got its act together, successive governments – through short-term thinking, ideology and political point scoring – have made long-term pension planning hugely more complicated. Consequently, the public lacks trust in the whole system.
In essence, it is the government that is undermining pensions today, not the financial-services industry. And remember, a pension is just a long-term savings plan with some tax advantages at its heart. It shouldn’t be this hard.
The last Budget might just be the nail in the coffin for private pensions. It not only removed the IHT exemption but added income tax to the beneficiaries of pensions – a double taxation hit of 64%.
But there’s more. On your death, the executors are likely to face two IHT bills: one from the estate and one from the pension. And pension firms will be responsible for calculating and paying the IHT bill. Remember, you have only six months to pay the IHT bill before a crippling rate of interest of 7.25% is applied.
Ros Altmann: The disaster of removing IHT exemptions for unused pension funds
As most executors are family members, this all comes at a time when many are still grief stricken. Can you imagine having to sort out a pension with many providers and make sure the tax is paid? It’s surely a bureaucratic and administrative nightmare for executors.
I’m no pension expert and I will be very interested to hear what you are advising clients to do before and after 2027, when these changes are coming in.
However, little of what I’ve seen can surely encourage clients to pour money into pensions when so much keeps changing. As it is now, most pull out their tax-free lump sum as soon as they are eligible to do so, for fear of losing it.
If the public really understood the appalling deal their pensions receive compared to public pensions, there would be a revolution
What a contrast to public-sector pensions, with their huge contributions from taxpayers and all those wonderful guarantees. No need to be worried about investment performance and markets when you retire – the pension comes in each month, come wind or rain.
Indeed, if the public really understood the appalling deal their pensions receive compared to public pensions, there would be a revolution.
Is anything going to change? Probably not. But I bet it would if MPs had to give up their public-sector pensions scheme, which gives them a pension of £5,000 after serving just one full Parliament.
What better way to focus MPs’ minds on the ordeals of private pensions than if they all had SIPPs. Then we could move onto the civil servants – especially those who work in the Treasury.
Unfortunately, turkeys don’t usually vote for Christmas. But something has to change.
Mark Dampier is an independent consultant and can be found tweeting at @MarkDampier
