Tory pension focus - a helping hand or disingenuous vote-grabber?

David Cameron

The conservatives are falling over themselves to cater to retirees - but what motives lie behind the rhetoric?

Claims by the Conservative Party that it will put pensioners "at the heart" of its plan for the economy have been branded "disingenuous" by the chief executive of a large advice firm, who claims it is a stealth tax-and-vote-grab.

The Tory manifesto, published on Tuesday, outlines the ways in which the party plans to help those approaching and in retirement – the most headline-grabbing of which allows more options for access to pension pots.

"We are building a Britain where everyone who has worked hard and done the right thing can enjoy security in retirement," the manifesto says.

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The grey vote

However, Nigel Green, chief executive officer of large IFA firm deVere Group, says the reforms "fly in the face of the very concept of pensions – which should be to provide an income throughout retirement".

He adds: "This overhaul of the time-honoured rules is, I believe, a thinly veiled ploy to boost tax revenues in the short term.

"The rhetoric smacks of a way to attract the so-called grey vote, an important and influential demographic for all parties, but perhaps especially for the Conservatives."

Although the idea of giving people more access to their pension savings rather than effectively forcing them to buy an annuity has been generally greeted with enthusiasm, other aspects of the reforms could reduce many people's income in retirement.

For example, the government's plan to reduce the lifetime allowance – the maximum value of all of your combined pension pots allowed before the excess is subject to punitive tax – from £1.25 million to £1 million could affect as many as a million people, according to some commentators.

The cut also represents a 45% decrease from the £1.8 million rate in force in early 2012.

Tax harvest

Andy James, head of retirement planning at advice firm Towry, says: "Let's not forget also that the projected tax harvest for HMRC increases materially as a result of these changes, thus indicating the need for thoughtful and reasoned financial advice in optimising a pension withdrawal strategy."

According to James, someone with pension savings worth £1.25 million could typically buy an annuity providing a guaranteed annual income of £42,000. In contrast, someone with £1 million in a pension could only secure an income of around £34,000 per year.

"With the tax charge on any excess over the limit running at up to 55%, there is certainly a need to take action to prevent the tax consequences if at all possible," he says.

"This is especially important if you have your pension invested and it is approaching the lifetime allowance – there is little need to take more risk to chase the growth of your fund if it will be heavily taxed."

He adds that, with the lifetime allowance set to increase in line with CPI inflation from 2018, more and more people could be affected if investment returns and even salary rises increase at a faster rate.

Find out everything you need to know about the new pension freedoms and how to plan ahead for the retirement you deserve with the new issue of How to Retire in Style. The magazine is available to buy now from all leading newsagents, priced at £4.99. It can also be ordered online here for £6 including postage and packing.

This article was written for our sister website Money Observer

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