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Autumn Statement 2012: Change isn’t always good, especially with pensions

Tom McPhail, head of pensions research, Hargreaves Lansdown

By the time George Osborne reared up on his hind legs to deliver his bi-annual repertoire of tricks, dodges, feints and peculiar brand of quasi-triumphalist self-exculpation, we already knew pensions were going to be a feature of this statement.

The only question was just how bad it would be. In the end, it wasn’t as bad as many had feared but it has made life more complicated for people trying to save for their future.

Full coverage of chancellor George Osborne's Autumn Statement 2012

The headline measures are:

  • From 2014 the annual allowance that investors are allowed to pay into their pension is to be reduced from £50,000 to £40,000 a year.
  • The lifetime allowance is to be reduced from £1.5 million to £1.25 million.

At one level this is thoroughly unwelcome; pensions are complicated and do not enjoy high levels of positive investor engagement, mainly because Governments keep meddling with the rules.

So any further adjustments or reductions are not good PR in the cause of getting people to save for retirement.

At another level, this is wholly irrelevant to the 98% of the population for whom such fantastical levels of pension savings are never going to be attainable.

To put it into context, with a pension fund of £1.25 million, a 65 year old man could buy himself an income of around £44,900 a year, which is a pretty big number, unless you happen to be an MP in which case you can expect such a pension as your right after around 25 years’ service.

The people hit

Those most likely to be affected by the annual allowance reduction are higher earning public sector workers whose final salary can jump in value in the event of promotion, and business owners who are looking to catch up on their pension funding as they approach retirement.

The picture is complicated by auto-enrolment, the Government scheme designed to get almost all employees into a pension over the course of the next few years.

Some higher earners may find themselves better off opting back out of the pension, which isn’t how these things are supposed to work.

Anyone who wants to know how much they might get from their retirement savings should use a pension calculator.

Good news for some

Anyone already in retirement who is using a drawdown arrangement to pay their retirement income may welcome the increase in income limits announced by the Chancellor.

On the one hand it means you’ll have more control of your money and you’ll be able to draw it out of your pension faster; on the other hand it also means you could run down your pension fund faster.

For some people this will be the pensions equivalent of the Chancellor finding someone knee deep in a hole and rather than a ladder to climb out, handing them a bigger shovel instead.

More monkeying about to come

We were also promised a white paper on state pension reform. Again.

George Osborne promised the same thing in the Budget, saying we would get it in the spring. Maybe he meant Spring 2013?