At what point could DC pensions become pointless?

stinktankcynic

Just some thoughts on what changes could happen in future.

You invest money, your boss pays in and you get tax relief and the stock market does well. You have a decent pot built up, let's say £100,000. You get full state pension and can take a £25k lump sum and an annuity of 6% on the balance.

If the government changes things, which it clearly is, what things would they need to do to destroy any benefit of having the pension? Where you would have been better off putting your cash into ISA'S etc from the start?

If they removed or reduced the lump sum?
If they increased the age of taking a pension to state pension age, perhaps 67?
If life expectancy tables show annuities have to fall further?
If a levy is placed on a scheme?
If they take a percentage from the pot for care insurance?

So if they restricted access to the pot until 68, stopped any lump sum, took a 5% charge for care/insurance levy and annuities dropped to 5% would it still be worth being auto enrolled?

hugheskevi

If they removed or reduced the lump sum?

Reduces but does not remove incentive for those paying a different rate of tax in retirement. Still likely to be the case that if there is an employer contribution, change of tax rate in retirement or salary sacrifice available pension saving is good value.

If they increased the age of taking a pension to state pension age, perhaps 67?

Reduces the total amount I want in a pension compared to other vehicles, but not to zero. So would lead to a rebalancing of retirement saving.

I recently updated all my future income modelling, and as a result shifted a lot of new saving toward a pension I can access at 50, as more income after age 55 would mean I would be wanting to do things like extend mortgage into retirement. That may or may not be possible, so I prefer to put the money where I know I can get it at 50 if necessary. If there was a further increase to age 60 it would result in me saving less in a pension as I simply wouldn't need the income then due to already adequate pensions and would instead use other vehicles.

If life expectancy tables show annuities have to fall further?

Irrelevant - would need to save more in other vehicles in this event as I would need to both plan to save for the extra years, and save more to cover the risk of living longer than average.

If a levy is placed on a scheme?

Depends on size, but the incentive for a 40/45% taxpayer to pay into a pension is significant, and a small levy wouldn't change this too much. But, it would depend on structure of levy and age - if I was 50 and a 0.1% p/a levy was introduced, I wouldn't care much. If I was 20 and 1% p/a levy was introduced, that's another matter.

If they take a percentage from the pot for care insurance?

Depends exactly how it is done, size, and whether I can use it how I like or if it is just a tax.

So if they restricted access to the pot until 68, stopped any lump sum, took a 5% charge for care/insurance levy and annuities dropped to 5% would it still be worth being auto enrolled?

Probably - the employer puts in 37.5% of the total contribution. The only loss from the things above is the 5% charge for care/insurance levy (and even that may not be a complete loss). So of my final pot, I contribute 62.5% of the value and receive 95% of the value. Assume 10% loss of expected value on annuitisation, that is 85.5% remaining. I'm still ahead.

Mind you, if the Government did even a fraction of that, I'd lose all faith in the stability of the system and wouldn't be putting anything into pensions for fear of further legislative change.

My fear is not of radical change, but more of insidious strangling of pensions, primarily through the freezing/reduction of the Lifetime Allowance. As a 36 year old, that makes it very hard to know what to do as I've no idea how that might evolve in the future. If it is frozen for the next 30 years, I probably need to stop contributing to a pension very soon, so I'm taking a risk on gambling that policy will change in the future.

Linton

I cant see the government wanting to discourage people from paying into pensions to provide for their old age as it would add greatly to public expenditure in years to come. Changes over the past 10 years have certainly been much more of an encouragement than the reverse.

Any restrictions I believe are far more likely to be imposed to prevent pensions from being used primarily for tax avoidance.

dunstonh

You have a decent pot built up, let's say £100,000.

£100k is not decent.

If the government changes things, which it clearly is, what things would they need to do to destroy any benefit of having the pension? Where you would have been better off putting your cash into ISA'S etc from the start?

Pensions and ISAs have the same investment options. So the returns would be the same. Only one has tax relief and employer contributions. The other has only what you pay in. If you assume employer matched contribution (which is most typical) then the ISA would be more than have the value lower than the pension and the income from the ISA lower as well.

If they removed or reduced the lump sum?

A rumour sent out by scaremongers every year or two and started as early as 1989. Yet future changes have actually increased the amount of lump sum available in most cases.

If they increased the age of taking a pension to state pension age, perhaps 67?

Why would they want to do that? If life expectancy shot up another 12 years from current then maybe but you cant see that one happening.

If life expectancy tables show annuities have to fall further?

Annuities had hit 5 year highs prior to the credit crunch. The way annuities are funded took a hammering with the gilt yields/interest rates but they have recently got to 2 year highs. Not quite back to pre-credit crunch levels but heading in the right direction.

If a levy is placed on a scheme?

No reason to put a levy on as the UK is more advanced in reform on pensions than others. The other changes have avoided that. You could also argue that the tax credit was a levy on occupational schemes.

If they take a percentage from the pot for care insurance?

Not something that is on the table. However, they could easily apply that to ISAs or any other tax wrapper. Indeed, given the small amount in personal pensions relative to occupational, you cant see what would be gained.

So if they restricted access to the pot until 68, stopped any lump sum, took a 5% charge for care/insurance levy and annuities dropped to 5% would it still be worth being auto enrolled?

You missed out invasion from Mars in your list.

Perelandra

dunstonh wrote: »

You missed out invasion from Mars in your list.

On balance, I think I would stop paying into my pension if we were invaded from Mars.

If the lifetime allowance were reduced further, then I'd need to consider pension savings carefully. A reduction to, say, a £1m would be fine if I were retiring now, but by the time I'm retiring any pension from a £1million pot wouldn't have much buying power.

So if the lifetime allowance were reduced, with no guarantee or intent about raising it in line with inflation, I'd not want to be tying up funds in my personal pension so much.

However, it's very hard to see any circumstances that would make my (employer matched) occupational scheme pointless.

bilbo51

Perelandra wrote: »

On balance, I think I would stop paying into my pension if we were invaded from Mars.

With your name I imagined that you were leading the invasion!

Perelandra

bilbo51 wrote: »

With your name I imagined that you were leading the invasion!

No, no! You're getting me confused with Malacandra!

BobQ

Perelandra wrote: »

On balance, I think I would stop paying into my pension if we were invaded from Mars.

.

Surely it would depend on whether the Martians were keen to invest in the economy or bent on destroying it ?:)


Seriously OP, its in the Government's interest to encourage investment in a pension which is why they give tax relief on contributions. We need retired people to have an income they pay taxes on and spend stimulating the economy. We need people to save into a pension to make sure the state goes not need to spend as much subsidising elderly care costs or living costs.

ukjoel

The total allowance cap worries me as politically its an easy target and also very hard for someone to avoid.

Someone with a pot of 600k at age 50 is likely to hit the CAP even if they don't invest a penny in pension between 50 and 65.


I think if this was introduced there would be a large number of people taking their pensions early at just the point the govt was benefiting most from them as taxpayers.

I am comfortable with the cap - just not happy about goal posts being moved after the game has started.

jamesd

Someone with £600k at 50 should probably take benefits at 55 to trigger a lifetime allowance test then. There's still another one at 75 but in the meantime the income they can take will reduce the pot size. If they don't need the income and don't mind risking the lifetime allowance limit they can recycle the income into more contributions. or they can reinvest in say VCTs to get some tax relief, to the extent that it's appropriate for them.

Thrugelmir

My personal view is that ISA's will suffer before pensions. There's a crisis looming as it is. Governments need to encourage long term saving. A culture which has been lost. In an age of short termism and spend today, pay tomorrow.