The Government has been very focussed on achieving political consensus on pensions, with some success especially on state pension reform. But on one area of pensions it's failed completely. No-one outside Government would pretend that the current rules on pension vehicles after age 75 are anything but a mess.
The current situation results from a sad combination of misunderstanding, mistrust and political dogma. The misunderstanding was over how we must deal with customers. The Government had the best of intentions in pensions simplification, and initially showed willingness to embrace genuine simplification.
A key early point for it was a gentleman’s agreement with providers that they wouldn’t run ‘buy now while stocks last’ campaigns while the legislation was being developed, and this largely held. But attempts to build on this voluntary restraint broke down when they conflicted with regulatory obligations to act in the best interests of customers.
Pension term assurance was a classic example. What the Government thought was a niche product became an essential recommendation simply because the tax relief made it much cheaper than the alternatives. When that happened, the Government removed the option.
The position with alternatively secure pension (ASP) is less clear-cut, but fundamentally similar. The Government only wanted it to be used by those with religious objections to annuities but couldn’t write this into legislation. With clients actively looking for alternatives to annuities, advisers naturally turned to ASP as a solution. The Government hadn’t foreseen this, and introduced penal tax charges on death (and may yet take further action).
The mistrust is from Government officials’ conviction that we will find loopholes in any concessions they give on retirement income. Whether they’re right or not, they’re convinced they need to keep the rules very tight to prevent unintended side-effects - especially money being passed down the generations against what they see as the spirit of the tax rules. This colours their response to any suggestions of changes to the pension income regime, especially after age 75. And the dogma is seen in the continued insistence that age 75 should be the maximum age for annuitisation, despite people living longer and efforts to encourage them to work longer. It’s become such an entrenched position that any change by the current Government seems highly unlikely.
Misunderstanding, mistrust and dogma. This unfortunate trio is holding back the development of the decumulation market. That won’t prevent market innovation, but the innovative products will be unnecessarily complex to fit into the legislative straightjacket. We desperately need changed attitudes on both sides, so we can work together to achieve better results for consumers that are acceptable to the tax authorities.
Ian Naismith is pensions market director at Scottish Widows.
The views expressed in this blog are those of the individual and not necessarily the company he represents.
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