Simplicity, security and choice are watchwords for what will happen when the Green Paper is put into action, says the DWP. However, there is more than a hint of sexing-up existing policy in the proposals
The Green Paper was published in December 2002. Following extensive consultation, the DWP then published a further paper in June this year headed Simplicity, Security and Choice, setting out how it intends to put the Green Paper proposals into practice.
Overall, it is a mixed bag, with some good bits, some bad bits and a lot of waffle, sexing-up existing regulations to try and make it look as though it has have come up with some original ideas.
Simplicity is definitely the best bit. Tax simplification: all those layers of legislation, eight different occupational and personal pension regimes, swept away at a stroke and replaced with a simple lifetime limit.
For somebody like me who has spent the past 25 years getting to grips with it all and explaining it to increasingly incredulous clients, it is something of a blow to find the whole basis of one's career flushed down the pan. For everybody else, however, I concede that tax simplification is an excellent idea.
The drawback is that the £1.4m lifetime limit is clearly too low. The shift we are experiencing from final salary to money purchase means more and more people will secure their retirement income through annuity purchase.
The cost to provide benefits based on the earnings cap of £99,000 is about £1.7m for a 65-year-old male and £2m for a female on current annuity rates. Furthermore, the annuity market has become fragmented and distorted by lifestyle, impaired life annuities and income drawdown.
An overweight, smoking, country dwelling male will secure a much higher income with his £1.4m than a thin, non-smoking, city dwelling female. This is blatantly unfair and smacks of discrimination. The lifetime limit should apply to the pension not the fund, as it already does under the present system ' although, of course, this would not be simplification.
The Green Paper goes on at great lengths about age discrimination but the central plank of the Government policy on pensions reform is sex discriminatory. How hypocritical is that?
The fact the lifetime limit will apply to death benefits is a major concern. It seems incomprehensible the Government intends to penalise the families of middle-ranking civil servants, doctors and police officers who are unfortunate enough to die early and discover that the capitalised value of their spouses and children's pensions has pushed them over the limit.
The news that contracting-out is to become simpler is most welcome but it has been tried before and look at the results. Let's hope they make a better fist of it this time. I can't wait to see what they are going to do with GMPs.
The Pensions Protection Fund (PPF) is a knee-jerk reaction to recent press coverage and looks utterly misguided. Just look at the current situation at British Airways: a company worth about £2bn, or at least it was before its present difficulties, with a £10bn pension fund and a £1bn deficit.
If BA is unable to recover from the recent cock-up at Heathrow, it is entirely possible the company could go bust, leaving a £1bn claim on the PPF before it even gets started. Presumably the Government is hoping the most vulnerable schemes will go belly-up before the PPF starts in 2005.
The requirement for solvent employers to buy-out members' benefits in full if they wind up their pension scheme is great in theory but may be unworkable in practice. The problem for employers/trustees is where exactly to find the necessary deferred annuity policies.
At the last count, there were about two providers of non-profit deferred annuities and the Green Paper does not appear to have sparked a rush of new providers so far.
The Government wants to do away with outdated, inflexible approaches to retirement. It intends to do this by opening up more options for flexible retirement and outlawing age discrimination ' the last bit is actually EC legislation but our Government is quick to take the credit.
There is a lot of waffle in the Green Paper about providing information to members through combined pension forecasts and a web-based retirement planner, allowing individuals to work and draw pensions at the same time. None of this is new or contains anything of any real substance that will actually give more choice to anybody.
The biggest changes are the increase to the earliest pension age from 50 to 55 and the increase in the public sector retirement age to 65. The only real choices we are being offered are the choice of working for longer or retiring later. So much for choice.
The proposed changes to pension fund withdrawal are an obvious improvement, with the minimum income withdrawal reduced to £1 and the facility to continue drawdown beyond age 75.
The changes to death benefits, however, are disappointing, although the reasons behind them understandable. It appears the recovery tax charge of 33% will only be levied prior to retirement. This is a big loophole for anybody with a fund of £1.4m to move into drawdown, take income of £1 per annum and continue to enjoy investment growth on their remaining fund.
Where the Green Paper fails miserably, as stakeholder has failed, is in the attempt to persuade more people to save for retirement. If the Government is serious about increasing the take-up of pensions then two key drivers are required: compulsion and incentives.
There is nothing new in this. We already have compulsion in the form of national insurance and incentives in contracting-out rebates. Compulsion alone does not work as people simply stop other forms of saving. Incentives alone do not work either as evidenced by the huge number of rebate-only APPPs in force. Until these issues are addressed, the pensions gap will continue to grow unchecked.
The Green Paper is to be commended for taking a real shot at sorting out the unbelievable mess that has become UK pensions legislation. It is apparent, however, that simplifying pensions is a complicated process and perhaps I might be in work for a while yet after all.
Andy Stowers, pension specialist at Larking Gowen Financial Services.
The views expressed in this article are those of the author, not those of Larking Gowen Financial Services
Annuity market worth £4bn in 2017
For ‘distress’ caused
Oversees £30bn of advised and D2C assets
Less than a third of top paid employees are women
£1bn business since inception