Of Pensions, Politicians and Promises

Short-term politicians and long-term pensions do not a happy marriage make.

Friend,

We survived Christmas: another memorial to mammon recedes in the memory. Crapulent waistlines expanding, gym memberships booming, February cancellations looming.

Through and amongst all of this, we must continue to plan for our future selves: a typical three-decade retirement means enduring enjoying 30 or more Christmases. These events don’t just go away when that career thing ends!

Whether we are spending inordinate amounts on trinkets, baubles and wrapping paper or just the mundane things that the rest of the year offers up to us, life and its attenuate costs needs funding.

Typically, retirement funding has been spelt p-e-n-s-i-o-n-s.

Which, in a somewhat tortuous way, leads me to the theme of this first essay of the 2025. Viz: what the hell are we doing with pensions in the UK?

Last year’s October Budget has generally been received like a bucket of cold sick. As some of us predicted, the UK pension landscape was indeed fruit of a low-hanging variety. So-called money purchase pension pots (also known as defined contribution, personal pensions etc) were once more brought into the Inheritance Tax (IHT) net, as they kind of were until 2015.

Personally, I don’t have much issue with this. Personal pensions are there to provide some form of retirement income. They were never intended to be intergenerational wealth transfer devices.

“The Financial Conduct Authority has just announced that 75% of consumers aged over 45 either do not have a clear plan for how to take money from their pension or didn’t know they had to make a choice…. Only 40% of people know their pension is invested in the stock market.”

Moira O’Neill, Financial Times¹

But…

Here’s the rub (and thanks to an excellent if paywalled article by Moira O’Neill in the FT): the continual fiddling by politicians with pension rules and regs has eroded faith in the UK pension system. And that is a very bad thing. The constant changes outlined in the article are an insult to the millions of people who have, with entirely noble intentions, delayed gratification, put aside money into their pension pots to save for their future selves and thus be less of a burden on a decrepit State.

As my friend and fellow IFA Alan Smith states in the article

“Your pension pot is now subject to Inheritance Tax. Before this proposed change it wasn’t. But before that it was.

But you no longer have a Lifetime Allowance. But before that you did. And before that you didn’t!

You now have an Annual Allowance. But before that was introduced you didn’t. But before that you did!

The bigger issue here is the constant meddling with pension legislation.”

It’s not just the rules being rewritten over and over again. It’s the complexity of the rules themselves that further push people away from even thinking about pensions, about whether they have “enough”.

HMRC’s pension tax manual is a gargantuan, sprawling mess of good intentions and entirely foreseeable - for those that choose to see - consequences. According to Ms O’Neill, the section on the Annual Allowance alone runs to 4,888 words (four times the length of this squib). I’m supposed to know what I’m doing in this field; more and more I doubt myself and have to lean on third-party technical support providers to help me navigate the advice I give.

More evidence that things are broken: pre-Budget, some people were nervous that pension tax-free cash was going to be further capped or even scrapped. So a significant number took their tax-free cash out a few days prior to 30th October, many of them on the understanding that they could put it back into their pensions within 30 days. Indeed, life assurance and pension platform techies told advisers this could be done. In a move that redefines the phrase “incredibly unhelpful”, only after the event did HMRC issue a briefing note saying this was not possible, and that if you’ve taken the toothpaste (tax-free cash) it can’t go back into the tube.

If the pros can’t grasp all the pension regulations and embedded nuances then Civvy Street doesn’t stand a chance. And that’s unacceptable.

The Problem: Final Salary Swanks v Money Purchase Plebs

A grotesque feature of our pension landscape is the massive “Them and Us” disparity. The mind-bogglingly complex UK pension rules are devised by people upon whom they have the least impact.

Civil servants, like most who “work” in the public sector, enjoy Final Salary (AKA Defined Benefit) pensions. Cripplingly expensive to fund and run, these are almost extinct in the real world. Somehow, in the public sector, without going to prison, you can run these schemes unfunded². This means that Petra (you, dear taxpayer) are paying Paul his index-linked, guaranteed final salary pension this year. And the next. And so on.

By contrast, our pension pots are exposed to the vicissitudes of stock market ups and downs, of annuity rates whizzing one way and other depending on prevailing inflationary forces, interest rates, Saturn’s position relative to Mars etc.

The people that draft pension legislation have none of these concerns. They know exactly when and what they will get in retirement. Us Money Purchase Plebs are at the mercy of these Final Salary Swanks, the politicians of all parties (for they too enjoy gold-plated, index linked pension benefits) and their civil servants, all 478,000 of them.

The essential problem is this: politicians are short-term, pensions are long-term: “Plebs over here have multi-decade pension pots that we can extract money from now to give to that faction over there that might vote for us Swanks in a year or two.”

This is the tension that must be resolved. How?

Solution

We need a cross party consensus (stop giggling) to take pensions out of politics. Much as I’m loath to suggest yet another quango stuffed full of the unemployed in suits, there is a desperate need for an independent office that handles pension legislation, one not subordinate to political influence.

A body that is only allowed by law to only bring in subtle changes to pensions every, say, 20 years or so. A body run by people who understand pensions and long-term planning. Obviously I would be absolutely perfect to run it and and am open to offers, although I’d need to work on my team skills.

In a brave pincer movement that will never happen but which gives me a warm glow every time I think about it, we should simultaneously move the public sector from their final salary arrangements to money purchase/personal pensions. Yes, there will be much wailing and gnashing. But it has to be done. Kicking this down the road will just mean bigger problems later. It is inequitable that the people who decide how and when we can take money out of our pension pots, how these pots are taxed in life and death, have entirely different retirement arrangements to those they impose these rules upon.

Is this pie in the sky stuff? Maybe. But to dare to dream is a start. And if you can’t dream a bit at the start of a new year, when can you?! Happy New Year to you all.

1. https://www.ft.com/content/221a62a0-e073-4744-a113-2081f4e2ee58

2. The four largest unfunded pension schemes make up 86% of public sector pension liabilities: the National Health Service Pension Scheme, the Teachers’ Pension Scheme (England & Wales), the Cabinet Office Civil Superannuation, and the Armed Forces Pension Scheme. Source: https://mallowstreet.com/Article/b74413#:~:text=solely%20as%20a%20result%20of,income%20to%20subsidise%20the%20schemes.&text=In%20the%20past%2C%20the%20liability,service%20pension%20liability%20and%20provisions.%E2%80%9D