Get ready for the pensions of the future

WHAT a remarkable year it has been for savers. Little more than 12 months ago Money Mail was campaigning fiercely for insurers to give retirees a fairer deal on annuity payouts.

Today, the whole system has been given an overhaul. But even these latest reforms may not be the end of the changes — so what could possibly come next for pensions?

One important unanswered question is the amount savers, and in particular higher-rate taxpayers, can claim in relief on their savings.

Currently, basic-rate taxpayers get 20 pc tax relief when they put money into a pension, higher-rate payers get 40 pc and top- rate taxpayers get 45 pc.

It’s an incredibly lucrative perk and means that the top 8 pc of earners in the UK (that’s anyone earning more than £50,000 a year) receive an incredible 50 pc of all pensions tax relief.

The bill for tax relief already runs at £34 billion (or £50 billion a year if you include National Insurance relief on employer contributions).

It seems extremely likely that this will change.

Politicians from all parties are openly discussing whether this needs reform. One suggestion has been to scrap higher- rate relief altogether and give everyone 20 pc relief.

That means that if you put £1 into your pension, the Treasury tops this up to £1.25.

A possible option would be to find a middle ground — 33 pc relief has been suggested — that gives an extra top-up to basicrate taxpayers and reduces the boost for the wealthiest.

This would have the benefit of being extremely helpful to lower earners while not killing off pensions completely for the wealthy — with the added bonus of not costing the Treasury anything extra.

THE LIFETIME ALLOWANCE

GOVERNMENTS have already tried to limit tax relief by cutting the lifetime and annual allowances of what you can pay into a pension. since the amount of tax relief that governments pay out is so vast, they see it as a giant pot of cash they can tap into whenever they need to find something extra in the Budget.

This tinkering is incredibly disruptive to savers and is one area that now needs stability.

In the last Budget, Chancellor George Osborne cut the lifetime allowance to £1 million. Put more than this into a pension and you will face a tax charge of up to 55 pc.

Last year the cap was reduced from £1.5 million to £ 1.25 million, affecting roughly 30,000 people. The annual allowance is now £40,000.

All these figures may sound utterly unachievable for the average saver — but further reductions in the allowance will start to hit increasing numbers of the middle classes, particularly those with final salary pensions. Because the size of this type of pension pot depends on a complex set of factors, including length of service, the generosity of scheme for every year worked and salary, it’s much tougher to work out whether your pension pot is affected. As a general rule, the nominal size of a final salary pension pot is calculated by taking last year’s salary, your length of service and inflation into account.

so, for example, an employee who had worked for a company for nine years and earned £60,000 a year in a good final salary scheme would have an estimated pension pot worth £160,000.

But the greater problem is that reductions in the allowances hit ambition. A pension pot of £1 million would give a 65-year-old an annuity — after taking £312,500 in a tax-free lump sum — of around £26,000 a year if they wanted to give an income to their spouse after their death and protect their pension from inflation.

It’s feasible that further reductions could spell the end of the higher-rate taxpaying pensioner.

Limiting tax relief is understandable — this can be done with an annual allowance.

But if we want savers to take responsibility for their pots, we should be allowing them to invest as they want and take more risk when they are younger, as they should. If the size of their pension passes £ 1 million because they have invested astutely, then they should be congratulated — not penalised.

BOOST YOUR COMPANY POT

AUTO-ENROLLING savers in pension schemes has proved a massive success. It has given a large number of workers the chance to have a savings plan for the first time ever.

It means that millions should have a better retirement than they would have done previously.

But one valid criticism of this scheme is that the amounts savers contribute are not enough to guarantee a wealthy old age — and, in fact, may give them a false sense of security.

staff currently need to contribute a minimum of only 1 pc of their eligible earnings into their schemes.

This is due to rise to 4 pc by October 2018 — with the employer paying in 3 pc; and with a further 1 pc gained through tax relief.

But experts say you need to be saving at least 10 pc, if not more, in order to guarantee a comfortable old age.

And so, since many have proved unwilling to take responsibility for looking after their old age savings, automatically increasing contributions over time would help millions to build up a pot of cash that, ultimately, they will be able to spend exactly as they want.

I hope you have found our series of pensions specials useful — and you can rest assured that whatever changes are made in the world of savings over the coming weeks, months and years, your regular Money Mail section will be there to guide you through it.