The age of flexible pensions

AS UNIONS reacted furiously to the publication of Lord Hutton’s public sector pensions review yesterday, Britain’s working population has a trickier issue to resolve than raising “French-style riots”: what to save and how.

Despite de-leveraging significantly over the last year, Brits are still not saving enough. And on top of the pensions deficit, it is now also vital to consider what regulatory changes lie ahead. Most importantly, savers could well find that they have more choice than ever to determine how they save – but that could include the ability to spend yourself into ruin as well as the flexibility to provide better for your retirement.

The UK’s looming pensions crisis is forcing the government into action, but not all of its intentions are yet clear. Most pressing is the deadline of April next year, which is when Labour’s complex proposals on a tapering tax relief for pension savers would come into effect if the coalition does nothing. Most commentators agree that the change would be overly complex to administer and the government has signalled its intention to ditch it.

But doing so means that the coalition has to come up with an alternative plan for pensions tax relief. The most likely outcome is a lower cap on annual pension contributions, probably of around £40,000-£50,000, a considerable drop from this year’s cap of £245,000.

Counter-balancing this curtailing of choice is an end to compulsory annuitisation, which the government announced in the June emergency budget. Under the latest proposals, pensioners will no longer be forced to buy an annuity at the age of 75 if they can demonstrate that they can generate a minimum level of income from their pension pot. Fidelity Investment Managers’ Tom Stevenson is hoping that this is altered further to require only a demonstration of capital rather than income: “Otherwise, people might be forced to annuitise part of their pension in order not to have to annuitise the rest,” he says.

If the coalition does go for a capital rather than an income requirement, it will enable pensioners to keep their funds invested and to rely on assets that deliver capital growth (such as emerging market equities) rather than pure income. Russell Investments’ Irshaad Ahmad thinks that either way, today’s savers should plan on keeping their pensions invested – particularly with bond yields so low: “Consumers can no longer afford to regard retirement as the ‘cut-off’ wealth accumulation point,” he says. “By moving all investments over to cash, many retirees unknowingly miss a huge opportunity.”

But beyond these changes, there could be a more fundamental alteration to the regulation of UK savings. Instead of maintaining the current hard distinction between ISAs and pension savings, it is possible that the government will enable savers to move money seamlessly between the two. Stevenson thinks that the current rigidity discourages people from saving because they do not want to lock up their money until retirement in case they need it for other purposes before then, such as buying a house. “Having a more flexible, holistic savings regime would give people the confidence to save knowing they can access their money but also roll it over into a pension when they feel ready,” he says.

Such a change would mean that individuals have more choice over how they save – but also more responsibility for how those savings are invested and used throughout their lifetime. With such a large gulf between the nation’s pension needs and its current capacity to fill them, that is a daunting responsibility – but also one that savers should embrace.