Pensions, Quoodling and the nanny state

Neil Copeland

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The term nanny state was probably coined by the Conservative British MP Iain Macleod who referred to “what I like to call the nanny state” in his column “Quoodle” in the December 3, 1965, edition of The Spectator.

I’m not sure when nanny took on the slightly pejorative sense of an interfering busybody dispensing unwanted advice and meddling where they have no business to meddle, as opposed to the the all singing, all dancing and not entirely unattractive Mary Poppins, spreading order where once there was chaos, joy where once there was sorrow and Dick van Dyck were once there were cockneys.

So if the concept of a nanny is slightly schizophrenic so too are my feelings towards the nanny state.

I like to strike the pose of a Libertarian (and indeed in my wilder imaginings, a Libertine), bridling with a righteous fury when I hear news of some interfering busybody or other lambasting the over 65’s for having a second glass of sherry of an evening, or suggesting that we should embrace the travesty of food without salt.

We have these do-gooders in the pensions sphere as well, as a recent article in the Sunday Times makes clear. The article states that:

“Pensions experts have warned that people seeking to make use of new drawdown rules risk depleting their pension funds before they die. Those on an income of £20,000 from sources other than the income drawdown are able to draw as much as they wish whilst those with less can draw up to 100% of the annuity income they would be able to buy. Experts warn that since people can remain in drawdown beyond the age of 75, there is a greater likelihood of funds being exhausted early.”

I actually think these new drawdown rules are a positive development. It is only available to those who can demonstrate an income from all sources of at least £20,000 pa. Presumably this level has been chosen to reduce the likelihood of the person becoming a financial burden on the state. So what the new rules do is to say, well Mr Responsible Saver, if you set aside a reasonable core level of income the state is not going to dictate to you how you spend your hard earned and hard saved cash. Of course the naysayers are concerned that these hard working, hard saving individuals will abandon the habits of a lifetime and run out and blow everything they have in excess of the £20,000 on Kristal champagne, a Ferrari or two and lucky number seven on the roulette table at the casino in Monte Carlo. And some of them might. And some of them probably should. And what concern is it of the state’s if they do as long as it does not result in a cost to the state?

And yet….. And yet….

Cheek by jowl by this article – Top earners miss out on pension tax relief – is another that suggests high earners are overpaying thousands of pounds in tax because they don’t understand how higher rate tax relief works in their personal pensions.

As the article explains employee contributions to defined benefit or occupational defined contribution schemes are automatically deducted from gross pay, so higher-rate taxpayers get full tax relief immediately. However, many employees now have personal pensions either individually or through work based group personal pension plans (GPP). In these plans, only basic-rate relief of 20 per cent is credited, with employees then responsible for claiming any additional higher-rate tax relief through their PAYE codes or their Self-Assessment tax returns.

If this is not happening it highlights a worrying lack of knowledge amongst a section of the workforce you might consider to be more financially aware. The Pensions Regulator has highlighted concerns about the governance of workplace DC schemes and the lack of support for members in such schemes. GPPs and other contract based arrangements were promoted to employers as attractive because their responsibility started and ended with the deduction and paying over of the member and employer contributions to a provider and the members could, effectively, look out for themselves.

Interestingly, we are seeing an increase in enquiries from employers who are beginning to recognise that such an approach is potentially failing their employees. These employers are looking to establish governance committees to ensure that contract based schemes continue to deliver value and remain appropriate for their employees. There is a particular interest in ensuring that employees receive appropriate information and guidance on retirement, which chimes with concerns expressed by the Pensions Regulator.

The fact is that DC is increasingly the pension option for most individuals. There is a massive challenge in ensuring that we improve the Financial Education of DC members so that they receive sufficient and appropriate information to allow them to make informed choices about their financial future and well being. And I think we have to accept that retirement and saving for retirement is likely to be transformed over the next decade and that pensions as we understand them today are only one part in an armoury for helping people to achieve this.

Choice is inherently good but also inherently risky – if you give people choices they have a propensity to make the wrong one, usually because they have a paucity or information and knowledge. Research has shown that people generally trust information that is provided to them in the workplace, more so than when it comes from other sources. Engaged employers have a key role to play in helping to improve their employees’ financial awareness and knowledge.

On balance I’m still not a fan of the nanny state. The objective has to be to raise the bar of financial literacy so that members feel empowered to make decisions for themselves. But that can’t happen overnight, so perhaps, until then, there is still room for good deeds, and those who seek to do good, for a little while yet.

Neil Copeland

Post by Neil Copeland

Director, pensions consultant and adviser to trustees and employers on all aspects of work based pension schemes.