When it comes to money you should never trust the government. They’ll squander your taxes. They’ll fiddle their expenses. But if you really want to see them do damage, you should look at pensions.
Last week the government announced its latest plans for pension reform. And I have to say that there were some very worrying implications for anyone who has been contributing to National Insurance over the last decade.
If that includes you – and it almost certainly does – then I recommend that you take immeditate action.
This is only general information – you should always take financial advice if you’re thinking about making any changes to your pension. But today I’d like to explain how the latest reforms could affect you. And the steps that I have taken to protect my wealth.
What the new pension rules mean for you
Last week the government released a green paper on pension reform that spoke of a ‘universal pension’. The general idea is that the state pays out one simple pension to everyone (around £140). No means testing and no matter about previous earnings – just one simple sum payable to all.
And the approach looks pretty sensible on the face of it. Pensions seem so complicated that any simplification is welcome. And not penalising savers (at the moment, people who haven’t saved anything get a top-up from the state) looks like the right approach to motivate saving.
But of course there will be losers in this sort of system. And that could include you. Vast swathes of the middle classes that have paid higher National Insurance Contributions (NICs) over the years will probably lose out. They probably won’t get a top-up. There will be no recognition of all the money they’ve contributed to the system over the years.
Sounds unfair? Of course it is. But it could get a lot worse.
There’s no money in the state pension fund
My bridge partner is a maths teacher. He works for the state – and he’s just had a bit of bad news.
The impact of the recent Hutton report into the pension arrangements for state workers was summarised in the popular press: ‘Work longer, pay more and receive less.’
“But” says my bridge partner “I’ve been forced into paying contributions for twenty years – I’ve also made voluntary contributions on top – and now they want to change all the rules.”
He’s rightly peeved. Had his scheme been in the private sector, he would have been saving into a dedicated fund with his name on it. The problem is that all his contributions have gone to paying existing retirees of the state. All swallowed up in a big black hole. All he’s got is a promise that future taxpayers will pay out when it comes to his retirement.
Ok, I know it’s fashionable to knock state workers for their generous final salary schemes. But there is a critical point here that affects all of us. And that is that you simply cannot take a government promise on pensions at face value.
Between now and the time you retire, they can and will change the rules on pensions. And if they are struggling to cover their obligations now, there could be real trouble coming down the tracks in years to come.
The fact is that the government’s balance sheet looks terrible. And despite coalition austerity plans, it’s deteriorating at a frightening pace. If this were a private company and they were responsible for my pension I’d say: “You’ve got to be joking.” I’d get my money out as soon as possible.
So yes, I think it is wise to take action. Here’s something I would consider.
Get your money ‘segregated’
Now, if you’re one of those people that looks set to lose out, you may be okay. If you have contracted out of the state second pension (formerly Serps) and got some of your NICs rebated into your own personal scheme, then well done you. You’ll probably end up better off. You’ll have been getting some of your NICs out of the government’s hands. And that’s got to be a good thing.
But if you haven’t there is another way to protect your wealth – ‘segregated client funds.’ What are these? Well basically firms dealing in financial services must hold your investments in a separate nominated account. Even if the firm goes bust, your holdings will be safe. Your pot. Your name on it. Your savings protected by property law.
Take self invested personal pensions (Sipps). I’m a big fan of these. I like the idea of seeing my valuation statements with my favourite stocks listed and my name and address on the top. I wouldn’t want my money tied up in a general pension scheme. I know what happened to Equitable Life for instance. If you don’t, perhaps you should!
And I certainly don’t care for a pension backed by a promise from the government and its agencies. How can you? Successive governments always have their own ideas, their own changes to make and their own bills to pay.
So an option is to use tax concessions to get your savings away from the government. Contract out of any government backed schemes and put contributions into a Sipp – especially if you’re a higher rate taxpayer. Once your funds are in a segregated account with your name on the top of it you can breathe a heavy sigh of relief.
Of course I may be wrong. Perhaps the universal pension will recompense those who have entrusted their NICs in the hands of the government. Perhaps Lord Hutton has got it all wrong. Maybe state workers will get their deal with the government and secure their final salaries as they’ve always been promised.
But I’m not taking any chances. A pension is just too important to leave in the hands of others – especially the politicians. I advocate taking control.
Read more here about why I favour a Sipp.
Good investing,
• This article was first published in the free investment email The Right side. Sign up to The Right Side here.
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Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.
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