Many people approaching retirement who are hoping that the pension pot they have acquired over the decades will meet their needs maybe in for a rude awakening.
If the report in the Express citing ‘Westminster sources’ becomes a reality then many potential pensioners are in for a right royal shafting.
According to the report the ‘overly generous’ higher tax-payers’ relief on pension contributions may be about to go. That would mean an extra Â£7 billion in the Treasury coffers as those on 40% tax would lose 20p in the pound in their pension contributions, something the LibDem chief secretary to the Treasury, Danny Alexander, has called for. Maybe it’s a good time to talk to an IFA and top up your scheme while you can.
But the real stinger is the possibility that the 25% pension tax free lump sum that retirees are able to extract from their fund to pay off debt and mortgages or go on that cruise may end up as tax free no more.
These proposals may never see the light of legislation, but they are a worry when those relying on the performance of a pension pot (not a final salary scheme) approaching retirement see the amount they get back per Â£thousand saved dwindle.
As I have always maintained, as a large pot of money builds up, both bankers and politicians eye it greedily and jealously looking for ways to get their sticky paws on it. Bankers do it via fund charges, politicians via tax. But the end result is the same. Less output for the pensioner after many years of sacrifice and contributing. These can be easily hidden when the markets are doing well in the boom years, but the damage they do becomes all too apparent in the lean years, as now. Especially when the stock and bond markets are also squeezing pension funds.
But if the funds had not been raided in the good years then the impact of the downturns would be limited.
A new weapon to attack pensions with has also now emerged in the form of the Bank of England’s asset purchase scheme, or quantitative easing (QE).
The BoE buys up bonds and gilts driving their prices up and therefore their yields down. The amount of money you can take out of a pension relies on gilt yield figures, the lower the yield the less you can take out in accordance with the Government Actuary’s Department tables. There is also the matter of any inflation that QE causes.
Any moves to raid the pots and attack upcoming retirees by reducing the tax free amount they can save or taxing money that was saved in the expectation of getting the 25% tax-free lump sum would be politically questionable, if not suicidal.
But if the government’s back is to the wall with growing (yes still growing) public debt there may not be any other easily accessible pots of money available. And that would show you how desperate things have really become.