Tory pension focus - a helping hand or disingenuous vote-grabber?
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.
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.
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.
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This article was written for our sister website Money Observer
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
The Consumer Price Index is the official measure of inflation adopted by the government to set its target. When commentators refer to changes in inflation, they’re actually referring to the CPI. In the June 2010 Budget, Chancellor announced the government’s intention to also use the CPI for the price indexation of benefits, tax credits and public sector pensions from April 2011. (See also Retail Prices Index).
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.