Malcolm McLean, senior consultant at Barnett Waddingham, has spent his career promoting pensions but believes new freedoms announced in the Budget will have a negative effect without better education and greater simplicity.
In the Budget, chancellor George Osborne announced that a 55% tax charge on pension fund withdrawals at retirement would be lowered to an individual’s marginal rate, meaning the more a person withdraws, the more tax they will pay.
‘I don’t think the majority of people understand what it means,’ said McLean (pictured). ‘They think it’s like they’ve got the money in the bank and they’re just drawing it out when they want it, instead of realising 40% and sometimes 45% of it is going to disappear in tax immediately.’
McLean believes there is an urgent need to explain pension reforms to the public. The reforms may have sparked public interest in pensions but there is a background of ignorance.
‘Where the pensions industry has fallen down, and the government to some extent, is its inability to explain things properly to the public,’ he said.
No sooner were people getting their heads around the Budget reforms than the government introduced another piece of potentially game-changing legislation in the Queen’s Speech, with rules that will allow collective defined contribution (CDC) pension schemes.
‘After this there should be a moratorium and a period of quiet but, of course, the next thing is we’re going to have an election, and the first thing a new government’s going to want to do is to change something,’ said McLean.
Too much, too late
‘The problem is we’ve continually chopped and changed and added things on, and when people talk about simplifying the system, they simplify going forward, never going back.
‘You end up with a situation where to get rid of a complicated rule, you introduce a simple rule, but you have two sets of rules.’
Auto-enrolment is a prime example, which McLean feels could be a lot simpler, especially for employers. He also thinks Labour’s wish to lower the earnings threshold from £10,000 to £5,700 is a good idea but comes at the wrong time.
‘It’s a pity they have contemplated doing it in the middle of auto-enrolment. You’ve got to let the auto-enrolment process go through first as it is and then repeat the exercise.’
McLean does support the creation of CDC, however, which he sees as a good replacement for declining defined benefits (DB) schemes, providing a guaranteed income for retirement. He previously worked at the Occupational Pensions Trust, a now defunct government body set up in 1973, to advise on the obligations of DB pension schemes.
‘Instead of people having to use their pension pots to buy an annuity, the scheme itself will provide the pensions, like a final salary scheme would. There is a fear this will cause many employers to give up on their final salary schemes, but this new CDC will deliver some of the benefits of a final salary scheme without imposing too many demands on the employer.’
Meanwhile, the government is still complicating matters by introducing two competing reforms at once. ‘One gives members absolute freedom to spend the money as they like and the other one does the opposite,’ he said.
A Budget announcement about which he is more positive is the guarantee of free and impartial face-to-face guidance to every DC member at retirement.
The third way
McLean was chief executive of The Pensions Advisory Service (TPAS) for 13 years and believes there is a ‘middle ground’ between guidance and advice.
‘Advice is making a recommendation to take out a particular product with a particular provider. We thought at TPAS there is a middle ground, which we call guidance. That’s where you go beyond giving people the facts but don’t go as far as making a recommendation. That’s exactly what it should be.’
He believes TPAS ought to be given a central role in the guidance, as does its current chief executive Michelle Cracknell who puts her case forward on page 12, but he said there was a an art to providing guidance without crossing the advice line.
‘The way you would do it is actually to suggest the questions to the individual, because most people don’t even know what questions to ask,’ he said.
‘You get to the stage where you’re almost telling them that it’s a good thing to join this pension scheme but you’re drawing back from giving them a formal recommendation to do it. There is a skill to this.’
Article appeared in the New Model adviser on 6th June 2014