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Budget 2014 - where did that come from?


Out of the blue, the Chancellor announces far reaching changes to the pension landscape. After years of increasingly restrictive, interfering and often ill-conceived legislation, we finally have some proposals that change direction and could lead to a dramatic change and improvement in the way that we all plan for our retirement.

The changes, and proposed further changes, increase flexibility and open up options for individuals to plan sensibly for their retirement in a way that hasn’t been possible up until now. Remove the pensions strait-jacket, let people make their own decisions and do things in the way that they want and I am convinced that we will see things transformed

It will take time to digest fully the implications of the proposals but initial observations are: 

  • We are thankfully moving away from the outdated concept of pensions and towards retirement saving. A pension should be something that the State provides. Retirement savings should supplement that pension and provide flexibility for people to use their savings as they wish to fit in with their own individual circumstances. 


  • Improving flexibility should make retirement saving much more attractive (but ‘beware the Greeks bearing gifts’. As we learnt to our cost in the past this might prove to be a Trojan horse; future Governments might revert to a more restrictive regime.


  • The Treasury will need to deal with the potential for wash through of earnings via retirement saving. If money can be paid into a scheme and then drawn partly tax-free and partly at their marginal tax rate then, there are juicy tax and NI savings to be had. All very nice for the tax payer but not an encouragement for saving! Given this, how long is it going to be before the (anomalous) tax-free lump sum disappears or NI and tax are (not before time) integrated?


  • Members of defined benefit schemes reaching retirement will, in many cases, inevitably want to move to flexible drawdown hastening the demise of such schemes. Potentially good news for sponsors and, if they have increased options at retirement, members, as well. 


  • If transfers or conversion of DB rights into DC pots at retirement become commonplace, DB schemes will need to adjust investment strategies and perhaps funding plans to reflect a shorter time horizon.


  • Proposals to restrict transfer options should be challenged. Individuals should have choice. Of course, they should also have access to quality advice in order to make decisions. Any improvements in this area would be welcome. The Financial Services regime, as it stands, is perhaps too restrictive for dealing with this and is, I suggest, one of the reasons why DC members have not always shopped around for annuities. The process is just too cumbersome and a lighter touch framework needs to be put in place; especially so if sponsors or trustees are expected to get involved.


  • The change from pensions / annuities to different savings vehicles will change demand for different asset classes will encourage innovation and competition in investments.


Just some preliminary thoughts on a topic that is bound to stimulate intense debate. The changes clearly will have far-reaching implications; some of which will only become clear over time, as people get to grips with the potential knock-on effects.

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