Pensions World

Abandon Nest, says editor Stephanie Hawthorne

Alarmingly, buying an adequate pension costs more than buying a typical house. The average price of a UK home costs around £225,000, but this would only buy a 65 year old male a pension of just over £13,000 – scarcely enough to live in comfort.

Anyone retiring shortly will face a much truncated pension. According to figures from Moneyfacts, annuity rates have fallen 45.4% over the past 15 years. The average annuity rate (based on a £10,000 purchase price) for a male aged 65 on 26 August 1995 was £1,111 – today it is a mere £606.

Tomorrow’s pensioners may also be faced with huge stock market volatility as they save for their retirement. Low and moderate earners targeted by the proposed National Employment Savings Trust (Nest) may be particularly affected. Even if possible growth is sacrificed to ensure more stable returns, the pension pot will ultimately be used to buy an annuity. Who can plan for a 45% fluctuation in returns?

Any system that relies on the stock market and fluctuating annuity rates as a vehicle for future moderate earners is doomed to fail. There will be at least four or five times in a lifetime when the stock market will fall 20%. Annuity rates are likely to continue to fall as life expectancy increases. Moderate earners have no room for slack if things go wrong.

After much reflection (and vacillation) I think that the only savings institution suitable for workers earning under £25,000 (roughly the average wage) is the government itself in a newly modelled state earnings related pension scheme (SERPS), but on a funded basis. It is time to call a halt to Nest.

Tax relief needs fine tuning

Turning from the low paid to high earners, the government’s latest proposals for pensions tax relief favouring a reduced annual allowance probably of £35,000 to £45,000 need some fine tuning. The National Association of Pension Funds (NAPF) has warned that the current proposals risk unfairly penalising those who are promoted or made redundant, or have to retire early because of illness.
The inclusion of “past service” into the planned tax workings will also hit those with final salary pensions who have spent a long time with their company. These individuals could find that a new assessment of their defined benefit or “final salary” pension benefits leaves them exposed to tax charges aimed at much higher earners.

Joanne Segars, NAPF chief executive, has said: “The planned regime has thrown up a series of issues that must now be resolved. If they are not, many people risk getting caught up in a bewildering and expensive set of rules that were aimed at those earning much more.”
Among the eminently sensible suggestions from the NAPF for the government are to:

• allow those getting “one off” benefits from early retirement or redundancy to carry forward some of those benefits into the annual allowance for up to five years
• carefully reconsider whether to include pre-April 2011 accrued service in pension input calculations
• clarify their thinking around ill health retirement, which includes those leaving work due to permanent incapacity.

Retrospective action is deplorable

Finally, the government’s controversial decision to use the Consumer Prices Index instead of the Retail Prices Index as a measure of price inflation for calculating pension increases from April 2011 means people’s accrued benefits could be cut. Among the worst hit will be armed services pensioners. Such retrospective action is to be deplored.

stephanie.hawthorne@lexisnexis.co.uk