Pensions Minister: Get ready for the 2012 revolution

jamesd

The gradual introduction means that small employers will just limit pay rises and put that money into their pension obligation instead. It's not going to be a net increase in costs unless they weren't planning to provide any pay increases for the next five years.

amibovvered

Lokolo wrote: »

This does really show your lack of understanding of pensions.

You can take your pension from 55, the age at which hasn't changed (to my knowledge). The only age that has changed that has to do with pensions is the state pension - which this has nothing to do with.

You have a short memory - up until about 18 months ago I could have taken my pension at 50 . . .

Lokolo

amibovvered wrote: »

You have a short memory - up until about 18 months ago I could have taken my pension at 50 . . .

About 18 months ago I wasn't really interested in pensions hence the big in brackets - to my knowledge

JonPhred

jamesd wrote: »

The gradual introduction means that small employers will just limit pay rises and put that money into their pension obligation instead.

Quite! There's no "free money" going into an employee's pension fund.

NEST as a scheme is just so wrong it's difficult to know where to start.

A pension scheme is just deferring tax for most employees. You get relief at your marginal rate on the way in and pay tax at your marginal rate on the way out. If you are paying the same rate of tax at both times then there's no benefit. Only if you are paying a higher rate when making contributions than when drawing the pension can you be said to "gain" any benefit in tax terms. It's the same as simple saving except that you don't have the same flexible control over the funds and the fund value isn't taken into account for means-tested benefits. The other difference is that part of your employer's total costs of employing you is paid into the scheme rather than directly to you but let's not imagine that the pension contribution from your employer is "free money" - as jamesd said, it's simply not available to you directly as wage/salary because it's being paid into the pension scheme.

NEST is described as "a low cost, easy to use option, which is run on a not-for-profit basis". It's very easy to run any scheme on a not-for-profit basis: you pay yourself a handsome salary, generous expenses and a massive contribution to a (non-NEST) pension with all manner of enormous bonus entitlements along the way. You also pay chunky commissions and fees to all those who will actually be administering the funds or are in the food-chain. So, for example, Tata of India will collect the funds and (after deducting their pound of flesh) hand them to the US firm State Street (already fined by US regulators for concealing from investors just how much they'd piled into sub-prime mortgage products) who will then (after deducting their pound of flesh) place them with hedge fund managers who will deduct their kilo of flesh. What idiot would believe the scheme could actually be "low-cost"?

Equities carry risks. Risk doesn't disappear just because our Govt actually believed the suits who told them this was a good idea (suits such as the strategy director of enormous fund manager Legal & General). Who will have to bail out the schemes that fail (self-evident answer on a self-addressed postcard, please)? How will the Govt be held to account for this outrageous pension mis-selling scandal when the chickens come home to roost (only to find that someone's made off with the henhouse) and who will pay the price for that mis-selling (same answer on same postcard as above)?

NEST is just the headline. The more general pension changes that come in at the same time supplement this major troughing opportunity for the usual suspects who, poor things, are having such a hard time of it at the moment what with being "all in it together" along with us little people so they need our financial support.

Sensible provision for retirement is as good an idea as sensible provision for a rainy day. However, those who don't have such provisions and have now realised the folly of spending more than they've had coming in would be better off paying down debt than feathering someone else's NEST.

dtsazza

JonPhred wrote: »

Quite! There's no "free money" going into an employee's pension fund.

True, but then that's also not changed by the incoming scheme. It's "free money" from the perspective of the employee, in that it's money which could be transferred from the company's ownership to their own, if they go through the steps necessary to claim it.

"Free" in the sense of "requires no marginal labour", not in the sense of "appears from thin air".

Or to look at it another way, it's part of your salary which is easy to forego if you don't claim it.

A pension scheme is just deferring tax for most employees. You get relief at your marginal rate on the way in and pay tax at your marginal rate on the way out. If you are paying the same rate of tax at both times then there's no benefit.

The latter sentence is true, but this case applies to almost no-one.

For starters there's the 25% TFLS, so that's an immediate 6.25% bonus on your deposits.

Additionally, your pension contributions come out of the "top" of your income (i.e. tax relief at your marginal rate), but you receive them at the "bottom" of your personal allowance. What I mean is that for a normal 20% taxpayer, you'll get a rebate on all of your contributions, but when you're drawing your income a good chunk of that will be within your personal allowance, and thus tax-free.

In the extreme case, if your pension income is below your personal allowance, it's entirely tax-free.

A concrete example - let's say someone (as a 20% taxpayer all of their life) saved up enough to get a £10,000 personal pension annuity on top of a £5,000 state pension. And these figures are after taking the maximum TFLS, which they can draw upon to supplement their income if they wish without being liable for further income tax. Then with a personal allowance of ~£10k they're paying tax on half of their annuity, which represents 37.5% of their overall pot.

The bottom line is that they got the full 20% tax relief going in, and are paying an effective blended rate of 7.5% when paying out.

Granted, there are pros and cons to pensions vs. other savings instruments such as ISAs, but the only way you'd get zero net tax relief is if you didn't take any lump sum, and if you had other sources of income that pushed you entirely over your personal allowance. Which are both relatively unlikely situations.

NEST as a scheme is just so wrong it's difficult to know where to start.

I agree that NEST isn't great (though I don't fully agree with your objections). Still, I expect it serves its purpose. If the government is going to make something mandatory, then it seems sensible that they offer a "reference implementation" if you will; a baseline which isn't very sexy, or particularly performant, but which can be counted on to be moderately good regardless of how well the private sector serves the market.

In fact in any situation like this, I wouldn't want the state version to actively compete with private companies, as that would likely end up as a waste of taxpayers' money.

So a mediocre, open-to-all scheme (NEST) exists - and if you think other pension schemes are better, you use them instead. It's no big deal.

pepe100

BAA1 wrote: »

What's the point of this new scheme if there is an opt-out.

A large majority of short minded people will opt-out and not take responsibility for their own future, hence the scheme will have failed.

What they should do is say that those who opt-out will not get additional benefits when they retire. They will only be entitled to the level of benefits in force at the time of their retirement based on if they had started paying into a pension from the date when they opted-out.

Why should everyone else pay to keep those scroungers who decide to opt-out
Everyones situation is different etc i have paid into pensions since i was 23 , i now have four deferred pensions because the companies no longer exist ,if i move my money i lose about a third if i leave it where it is i get annual charges , i have worked since i was 15 and been unemployed maybe about a year out of my working life , i am now 47 i will not be joining any government pension and for the record most of us arent short minded , just sick of getting ripped off , i have already paid my 30 years NI , will the government be telling me i can expect to see the extra in my wage packet every week , i dont think so , so remember every one is not the same they have different opinions .

Loughton_Monkey

pepe100 wrote: »

What they should do is say that those who opt-out will not get additional benefits when they retire. They will only be entitled to the level of benefits in force at the time of their retirement based on if they had started paying into a pension from the date when they opted-out......

I agree with this. I believe the vast majority of people agree with this. In fact there are some who don't and for the life of me I cannot understand why.

There is already a "safety net" provision. This is generally in the form of 'Income support' and at state retirement age, the 'State Pension'.

Any further support should be strictly 'needs' based and 'deserved' based. I believe in total freedom not to pay into a pension, provided it goes hand in hand with equal freedom of the majority not to have to pay taxes to pay onto those who chose to spend every penny when they got it. Basic state pension is, in effect 'compulsory' [paying your stamp] and so basic state pension becomes a 'right'. Fine. But anything else tends to be inequitable, expensive, immoral, and downright offensive to other tax payers.

JonPhred

dtsazza wrote: »

... If the government is going to make something mandatory, then it seems sensible that they offer a "reference implementation" if you will; a baseline which isn't very sexy, or particularly performant, but which can be counted on to be moderately good regardless of how well the private sector serves the market.

In fact in any situation like this, I wouldn't want the state version to actively compete with private companies, as that would likely end up as a waste of taxpayers' money.

I don't follow what you mean. NEST is fundamentally private sector - it's absolutely not a state pension (just an expensive state-like wrapper). It will inevitably involve a waste of participants' money (those start-up costs as well as all the fees in the chain) and, yes, it will likely end up in some cases as a waste of taxpayers' money - when the bail-out is required.

There is absolutely no indication I've seen that it "can be counted on to be moderately good regardless of how well the private sector serves the market". NEST can't be "moderately good" if the rest of the private sector providers are performing badly. Risk is risk and NEST won't exactly be risk-averse judging by its invitation for bids last November for managers for some of the funds it will use such as "diversified beta/growth funds" and "diversified alternative/completion funds" - which I translate as "hedge funds".

I don't understand the logic of an auto-enrolment accompanied by assurances that there will always be an opt-out. Strikes me that a small employer could nominate NEST as their mandatory workplace pension scheme and all employees could opt out of it. I just don't get how this is all expected to bring about every person retiring from employment having an adequate pension fund (in several decades from now) such that they make no demands of the state (the object of the exercise). If it's just an "awareness-heightening" exercise then it's a damned expensive one. Perhaps it was conceived as fully mandatory all-round so as to directly address the problem and then gradually watered down until it became vague and pointless but vested interests kept it alive when it should have been quietly put to sleep and allowed to join Stakeholder pensions.

... the only way you'd get zero net tax relief is if you didn't take any lump sum, and if you had other sources of income that pushed you entirely over your personal allowance. Which are both relatively unlikely situations.

Really? Only "unlikely" if you limit scope. I take your point about TFLS but it doesn't take a vast sum from other sources to fill the gap between full state pension entitlement at the proposed flat-rate of £140/£150ish and the age-related personal allowance. I reckon having the equivalent of all pension income taxed would be far from "relatively unlikely" in the whole population of the retired. Biggest financial incentive to pay into pensions is for those receiving relief at higher rates who anticipate not being HR taxpayers in retirement. Escaping compulsory annuitisation may be an added incentive for such souls (I haven't looked at the rules as they don't apply to me and I'm not "in the trade").

jamesd

The big deal about NEST is that it's not a good deal but is going to be positioned and promoted as something it isn't, when compared to the best on the market: a low cost option. Add in the ban on transferring out to something better and it's not a good idea to even get started using NEST if there's any way at all to get an employer to use one of the better options.

JonPhred wrote: »

I don't understand the logic of an auto-enrolment accompanied by assurances that there will always be an opt-out.

Studies have shown that automatic enrollment causes more people to be in a pension scheme because inertia that stops them from joining changes to inertia that stops them from opting out.

JonPhred wrote: »

Strikes me that a small employer could nominate NEST as their mandatory workplace pension scheme and all employees could opt out of it.

Were I an employer who didn't want people to use the pension I might well be tempted to use NEST for exactly that reason: to encourage employees to opt out because of its costs and restrictions.

JonPhred wrote: »

Biggest financial incentive to pay into pensions is for those receiving relief at higher rates who anticipate not being HR taxpayers in retirement.

Not quite true. Basic rate tax payers using salary sacrifice and having an income under £10,000 in retirement will get at least 32% tax relief on the way in and zero income tax on the way out. At £15,000 income they effectively pay just 10% income tax on the non-state pension income. Those benefits exceed the 20% gain from higher rate in employment to basic rate in retirement.

The highest incentives come from cases like loss of personal allowance over £100,000 which creates a high marginal tax rate. Same for those on the margin of basic and higher rate tax who lose child-related benefit income if even £1 is higher rate income.

paulgbar666

Correct me if I am wrong but if you do not contribute ANYTHING to any pension scheme apart from NI contributions you will receive means tested benefits equal as though you had a pension pot of £100000.00; this works even if you have not made any NI contribs
How many people can seriously achieve a pension pot that large; not many!
Therefore all you are doing is subsidising the govenment.
Therefore do NOT contribute to this scheme if you cannot achieve a pension pot of at least £400000.00 which will give you a pension of about £13000.00.
This as the state will give you exactly what you would ultimately get via means tested benefits.
Remember before you retire pull out ALL your savings in cash, close savings accounts down; do this about a year before though.
Then when you are completing benefit forms you haven't got any resources and you need means tested benefits which will give you the same pension as if you had a pension pot of £100000.00. Simples!
I thing the DT did several pieces on this ridiculous situation which effectively taxes people who had a pension pot of £100000.00 at a marginal tax rate of 70%!