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Capitalism is the best system, but has it been undermined by QE

28 September 2017

  • Mrs. May is right – capitalism boosts growth and economic progress but she fails to recognise central banks have distorted capital markets with dangerous political consequences
  •  Government bond markets are rigged in favour of the strong at expense of the weak as QE redistributes wealth away from the young and enriches the wealthiest groups
  •  Central Bank policies have operated as disguised fiscal policy without democratic accountability
  •  Socialism is not the answer – that would make everyone poorer – but we need better policy responses to problems of debt and inequality

The Prime Minister is today speaking at the Bank of England to celebrate its 20 years of independence. But she has failed to recognise the irony of trumpeting the virtues of capitalism in the seat of monetary policymaking which has, for the past ten years, undermined many of the principles on which capitalism is based.

In theory, the central bank operates independently of Government, but in practice, its unconventional monetary policies have acted as a democratically unaccountable arm of the Treasury.

It is understandable that, in the face of the 2008 financial crisis, policymakers were looking for new ideas to save the banking system. They used monetary policy as the weapon of choice, on the pretext that there was no alternative and Japanese-style economic conditions must be avoided at all costs. This view prevailed and the side-effects or long-term consequences of so-called ‘Quantitative Easing’ were not really considered.

As an emergency response, one can understand that this policy had appeal. It could be introduced quickly, would boost capital markets and allow Governments to borrow more cheaply. But the transmission mechanisms for economic revival were not carefully monitored, nor were the damaging side-effects considered seriously.

The fact that QE has turned out to be just a fancy name for ‘printing money’ to finance government borrowing has still not been recognised. Instead of the politicians printing the money, as would be the case in many banana republics, this time is was the ‘independent’ central banks. This gave the exercise an air of respectability and the benefits to Government and financial markets were so enormous that it has been adopted around the world.

Normally, markets would punish countries which just created new money to finance their borrowing, but when all major countries are doing this and the policy enriches financial market players and the wealthiest groups, the capital markets have turned a blind eye to the underlying reality and keep pretending that central banks can just ‘unwind’ QE once it wishes to tighten policy again.

Of course, this is simply not credible. But far from worrying about how to deal with the stock of debt on central bank balance sheets, for the past years they have just kept on creating more huge sums to increase their purchases. Even after the economic emergency has passed, the monetary drug continues to be administered. Talk of ‘tapering’ has already caused market dislocations, but don’t forget that this ‘tapering is only creating less new money’, it’s not stopping the policy, let alone reversing it. The Fed has begun to make noises in this direction, but the scale of the task is so enormous, it’s hard to see how anything meaningful could be achieved without causing market mayhem.

And politicians have bought into the QE story completely. Of course they have, because it helps them so much. Without QE, the cost of borrowing to finance current Government spending would be far higher and politicians would have to make difficult decisions (much harder than the ‘austerity’ that has been so vilified here). They would have to cut spending further, or raise taxes or keep borrowing ever more until the markets lose confidence.

But the truth is that central banks have become an arm of fiscal policy. Buy buying so much sovereign debt, they have allowed policymakers to believe they can afford more spending and lower taxes. The longer QE persists, the deeper the hole is being dug in public finances and the harder it will be to climb out.

But the difficult decisions cannot be ducked for ever. I believe the fallout from the unconventional monetary policies is having political consequences which are now causing a loss of confidence in our entire capitalist system.

Ordinary people have not perceived much benefit from QE. Yet they have seen how it has enriched wealthy groups, boosted asset markets and helped the financial sector. Meanwhile, they have felt the pain of rising rents and house prices, students have been saddled with mounting debts that don’t reflect current low rates, younger workers have been shut out of final salary-type pensions as QE has made them increasingly unaffordable.

Recent political events demonstrate disaffection with conventional politics. The votes for Brexit, Trump, Macron and far-right nationalists in Germany and other EU countries have been a shock to the established order. I think one could argue that the sudden surge in populism represents a loss of confidence in capitalism, economic policy and democracy.

Britain is suddenly engaged in a battle between the hard left and the hard right. It is also facing a hard Brexit. There are no easy choices, but leaving the EU when there is the real threat of Marxist expropriation of private assets and punitive taxes on wealth creation would further damage future generations.

I suggest that unconventional monetary policies may have played a role in the rise of populism and voters’ desire for change. So far, such potential impacts have been ignored. Yet, the side effects of Quantitative Easing (QE), especially after so long, may be feeding popular disaffection with the entire capitalist system. Mrs. May has not recognised this yet, but it would be advisable to consider it.

Capitalism assumes free flows of capital and market forces, to allocate resources and determine outcomes. But global monetary policy has interfered with capitalism as central banks have artificially distorted capital markets, possibly undermining the basis on which the system depends.

QE was introduced as a supposedly temporary emergency experiment to revive growth by lowering long-term interest rates once short rates were approaching zero. Buying sovereign debt with newly-created money pushed up bond prices thus lowering yields. Initially, savers were told they should be grateful for a return ‘of’ their capital, rather than expecting a return ‘on’ their capital. I believe there were alternatives to QE – for example if the Government had decided to take RBS (and possibly Lloyds) into national ownership on a temporary basis, it would have ensured shareholders lost out in the way capitalism intended, rather than being paid by the Government for shares that were effectively worthless. I know this may sound heretical, but it is a sounder capitalist solution than QE has turned out to be. It would also have helped shore up the prudence of the banking sector, when shareholders realise they can lose everything if they allow companies to operate so irresponsibly.

Once in public ownership, these huge commercial banks could have used their nationwide networks and branches to ensure lending reached small businesses across the country and could have been managed by keeping bank staff on, rather than by civil servants. The aim would be to sell the banks back into the market once the economic emergency was over (as it has been for several years) and better protections had been put in place to avoid a repeat of the reckless lending that caused the crisis.

That is of course with the benefit of hindsight, but I was saying this at the time. However the attractions of QE were much greater and Labour was frightened of nationalisation, having spent so many years trying to overcome their leftist image. It is ironic that the fallout from fears of nationalisation has been partially to boost the rise of extreme left Labour. These policies have been roundly discredited in the past and Venezuela is a more recent example of the economic failure of extreme left economics. But with so much anger and disaffection at the status quo, more radical ideas are required.

The Tories really need to confront the problems facing our nation with a better understanding of what has gone wrong. And when will they admit that a ‘no deal’ Brexit would compound the economic catastrophe that seems to be looming.

With or without Brexit, the perils of monetary policy should be recognised. It seems that the drug is so powerful for strong groups that they cannot bear to give it up. But the short-term ‘fixes’ are storing up more problems as time goes on.

The problem for capitalism is that Government bonds are supposed to be ‘risk-free’ assets. As the lowest risk asset class, other capital markets – and models of capital market pricing – use this benchmark. QE has distorted this ‘risk-free’ rate. With a buyer determined to boost the price of these assets, it is no longer a free market. And when bond yields fall sharply, investors need to find other sources of return, which pushes up all other asset prices. Asset prices across most markets have soared.

And the policy has been maintained well beyond the economic emergency. Despite rising growth and employment, global central banks have continued creating more money to buy more and more bonds, thereby artificially distorting capital markets even further for almost ten years. This has benefitted powerful interest groups, which may explain why the policy has been prolonged, but it has also disadvantaged others. With 90% of ordinary people’s savings being in cash or cash-like instruments, most people felt the pain or QE as saving rates plunged, while the wealthiest 10% have benefited enormously from rising asset markets in which they hold much of their wealth.

Artificially boosted asset price increases have negative effects on society, because assets are unevenly distributed. The top 5% of households own nearly half of UK assets and 80% of all assets are owned by the over-45s. So, the wealthiest and older households have become even wealthier, while QE-induced house price rises lead to higher rents, which have further disadvantaged non-homeowners and the young. Such social and distributional side-effects of unconventional monetary policies are under-recognised, perhaps because the policy is so beneficial to Governments, but politicians would do well to consider the potentially damaging political consequences.

In effect, monetary policy has acted like regressive fiscal policy. If politicians announced tax changes to enrich the wealthiest groups and redistribute money away from younger and less wealthy people, there would be a voter backlash. But disguising such fiscal measures as monetary policy has achieved similar impacts without democratic accountability.

The powerful groups who benefit most from QE – governments, financial market participants and the wealthiest – have so far held sway, but it is important to consider the democratic dangers to capitalism which prolonged QE may pose.

Such ongoing redistribution may at least partly explain disaffection with the ‘establishment’ and rise of populism. Many voters have started to realise that something is not quite right, that the economy is not really working well for them, but are not sure why. So they vote for change, anyone that promises different ideas.

Politicians may have started to feel the consequences of such disaffection. But what can they do about it? Asset bubbles have been inflated in many areas, debt levels have risen and consumers are over-extended. Perhaps a dose of ‘people’s QE’ or debt write-off will be needed in years to come.

September 28, 2017   No Comments

Don’t just focus on the negatives of pension reform – but need FCA to reform advice

26 March 2015

New Pension rules offer opportunities for better financial engagement

FCA needs to authorise basic advice to help people make good decisions


Last week I participated in a really good breakfast discussion about the Pensions Revolution taking place in the UK, hosted by Investec Structured Products.  Pensions experts Robert Cochrane of Scottish Widow, Tom McPhail of Hargreaves Lansdown and myself were joined by ten leading personal finance and retirement journalists to discuss the pension changes starting on 6th April. It was especially interesting to get the thoughts on the reforms from a wide variety of viewpoints..

I think just about everyone round the table believes these changes are a good thing. This was reassuring, particularly as so much comment has recently focussed on the negatives and risks of the reforms, rather than how they can help overcome the straitjacket of the past system.  Understandable concerns were expressed about the speed with which these radical changes are being implemented, and it is clear there needs to be a much greater emphasis on financial education and information to help people make the most of the new opportunities – and avoid the risks.

These reforms will have a significant impact on the entire investment industry. Gary Dale, from Investec explained alternative investment approaches that could replace annuities and also emphasised the importance of engaging with investors at a young age- I couldn’t agree more. We need 20 year olds to have a grasp of investment opportunities and to be able to react with confidence.  In the past, there has been too much emphasis on encouraging members not to bother to think about their pension investments at all, just leaving it to the industry to give them ‘one-size-fits-all’ default options.  In future, as more investment options become available, the need to improve financial literacy also increases.

This new challenge for the pensions industry is to help people understand investment from the moment that they start saving for their pensions.  Financial education could be embedded into auto-enrolment pensions, so that everyone starts to learn about pensions as soon as they begin contributing. But it is vital that this is done in an engaging way, clear English, no jargon and hopefully some gamification and mobile communications to make pensions more ‘fun ’and ensure the members can understand the basics of investing for the long term.  .

Another important issue discussed round the table was that the FCA rules on financial advice have locked average savers out of independent advice.  The Retail Distribution Review has polarised the advice market towards the wealthiest savers, who pay a fee for financial advice and the majority of the market are left paying commission (often without realising it) to buy products without any advice at all and often making inappropriate choices.

I have urgently called for the FCA to investigate the possibility of authorising a system of ‘simplified’ or ‘basic’ advice, that could be offered at reasonable cost, to help people make better decisions.  Pension Wise Guidance will help, but will only set out people’s options and help them realise what questions they need to ask, it will not give them the answers they need.  It also starts later than people ideally need.

Of course, many people will keep working longer in future, so planning their pensions and savings in combination with work income, will be important for the future.  Starting early and ongoing checks along the way to update financial plans will be needed.  The pension changes give much more flexibility for people to use their pension savings to fund later life in the way that suits them best.

I am sure there will be many more of these roundtable discussions in coming months and I hope this will be just the start of adjusting to the brave new world that is opening up.


March 26, 2015   No Comments

A Savings Revolution to follow the Pensions Revolution

18 March 2015

We had the Pensions Revolution last year, now comes the Savings Revolution

  • 95% of savers will pay no tax on their savings – will be popular
  • 5m will be allowed to sell their annuity – that’s great news
  • But cutting Lifetime Allowance for pensions is really bad policy
  • Lifetime limit should only apply to DB, but abolished for DC

So there we have it.  The last Budget before the General Election.  A mix of moves to please as many of the electorate as possible, but without committing massive amounts of extra spending.  There is help for savers, help for first-time housebuyers, but nothing to help with the social care crisis.

The main news this time is the help for savers.  This is unquestionably good news for ordinary savers with 17million people benefiting from the decision to scrap basic rate tax on the first £1000 of savings income each year.  This will be popular, as 95% of savers will not pay any tax on their savings income.  Savers have paid tax on their income when they earned the money, so allowing them to earn interest on it free of tax makes sense.

What might this mean for savers?

People with £50,000 savings may not pay any income tax on their savings:  If we assume savers earn 2% interest on their money, then they can have £50,000 in a savings account and will still pay no tax on their income from those savings.  Even if they earn 4% interest (those days seem like a distant memory but who knows they may return) then someone with £25,000 of savings would still pay not tax on their interest.

Non-taxpayers won’t have to reclaim the 20% tax deducted from their income:  At the moment, banks and building societies have to deduct 20% tax from all interest income before it is paid out and non-taxpayers have to reclaim the tax withheld.  In many cases, this money is never actually claimed as the recipients do not know they have to do so.  Pensioners are one of the groups least likely to reclaim the tax, so this will be of benefit to them.

Higher rate taxpayers will have to pay the additional tax above basic rate and the top 5% of savers will still be able to shelter money in ISAs to receive tax free savings income.

ISA savings will also become more flexible:  At the moment, if you invest the full £15,240 into an ISA at the start of the year and then take some money out, you cannot put more back again that year.  In future, the Government plans to allow you to put money in, then take it out again if you need to and reinvest back up to the full annual ISA allowance later in the same tax year.  It is not clear how this will be tracked and I can foresee some administration issues, but the principle is a good one.

So what about pensions – some good news, some not good news:  After last year’s bombshell, we could not possibly expect a similar scale of change.  Building on the pensions revolution started in last year’s Budget, the Chancellor wants to extend the new idea of freedom and choice much more widely.  However, to pay for the giveaway to savers, the lifetime limit on pensions has been cut sharply again.

Undoing unwanted annuities:  The pensions revolution that proved so popular last year has been extended to try to include those who had already bought annuities before the rules forcing most pension savers to buy annuities were scrapped.  The Chancellor intends to offer those who were previously forced to lock their pension funds into irreversible annuities, the chance to sell them again.  Many never actually wanted, to annuitise or bought unsuitable products and understandably felt most aggrieved that future pension savers had freedoms they were denied.  So a consultation has been launched that proposes allowing people to sell their annuities.  They will receive a cash lump sum that they can either spend – but will be taxed on as income – or can reinvest into a pension drawdown fund and then only pay tax when they withdraw their money.  This is a fair and sensible policy.

Regulatory protection and advice crucial:  Of course there are dangers that people will be ripped off if companies buying their annuities offer a poor deal.  Many annuitants paid high charges when buying the annuity in the first place or received poor value, so that would be adding insult to injury.  Therefore, we need careful regulatory oversight of the second-hand annuity market, perhaps with controls on charges and making sure people get proper independent advice before trading in their annuity.  The Pension Wise guidance service is likely to be extended to offer help and information with the decision, but advice and regulatory protection are really needed.  Of course, nobody will be forced to sell their annuity.  It will be their choice, but one which they would not otherwise have.

There are circumstances in which allowing people to sell their annuity will be sensible: Those with small pension funds and plenty of other retirement income may welcome the chance to take the cash for urgent expenses or debt repayment.  Others may need to provide a pension for a partner which was not included in their annuity.  Those with guaranteed annuity rates that only offered single life products will have a chance to cover their partner and those who prefer to leave their pension money invested for a few more years will be able to do so, whereas under the old rules they would have needed huge sums (around £100,000 or more) to be able to use drawdown.  Controls on charges or other customer protection might be needed, but at least people will not be stuck for life in an unsuitable product.

However, the other big change to pensions is far less welcome:  Cutting the lifetime limit from £1.25m to £1m is very disappointing.  Indeed, in 2014 the lifetime limit was still £1.5m, it is now £1.25m and cutting it down to £1m is a draconian change.  Cutting the lifetime allowance so sharply makes it much harder for people to plan their pension savings over the long-term.  This is expected to raise £600m in extra tax revenue and will hit many people in final salary or defined benefit pension schemes, as well as those in defined contribution pensions.  The Government suggests that only around 4% of pension pots are above £1million and that it will offer protection for those already near or over the limit, however it is really a shame that this policy has been introduced.

Lowering LTA adds more complexity and penalises investment success – both are bad for pensions: Firstly, it makes pensions still more complicated by adding yet another layer of protection into the rules.  Secondly, it is a penalty on investment success.  Surely the point of pension saving is to benefit from long-term investment returns.  That means it makes sense to limit the amount people can put in with the help of tax relief, but does not make sense to then try to punish them if their fund grows sharply.

Lifetime limit far more generous for DB schemes than DC:  The lifetime limit of £1m will allow members of defined benefit (final salary/career average) schemes to have a pension of up to £50,000 a year within the limit.  However, members of defined contribution pension schemes (which is the  majority of workers outside the public sector) could only buy a pension worth around £25,000 for £1m (with inflation linking and spouse protection), so the lifetime limit is unfair in this respect due to the calculation methodology of the rules.

A lifetime limit for DB schemes makes more sense, but should be abolished for DC: For members of defined benefit pension schemes, who do not have an actual pot of money but are promised a specific level of pension, perhaps the lifetime limit makes more sense, since they have no control over the investments and the contributions are harder to measure due to fluctuations that occur depending on the scheme’s assessed funding levels.  With defined contribution schemes, the better policy would be to control the amount put in each year but then allow the pot to grow as well as it can, without penalising it if it rises strongly.  Therefore, I would like to see the Lifetime allowance abolished for DC schemes.

Nothing for long-term care:  It is disappointing that there are no new measures to help or encourage or incentivise people to put money aside for funding long-term care needs.  Families are not prepared for care, nor is the Government, yet there is a crisis looming which could eat up the resources of many families who might have been able to put some funds away if they had known about it – and could also bankrupt the NHS.  The next Government will have to get to grips with this crisis urgently, time is running out.

Help for younger first time housebuyers with a pension-style ISA plan:  The new ‘HelptoBuySA’ effectively turns the savings of young people preparing for their first house purchase into house pension plans, by offering the equivalent of basic rate tax relief on their savings.  If they need a house deposit of £15,000 for their first home, they will only need to actually save £12,000 and the Government adds the additional £3,000 they require.

March 18, 2015   2 Comments

Pensioner Benefits

24 February 2015

  • Protecting pensioner benefits is politically astute but also makes some sense for now
  • Tinkering with the current package of benefits is not a solution – they could be taxed or paid from a later age, but the whole system should be rationalised
  • A proper assessment of all later life support is needed – including social care

If the Government just stops paying pensioner benefits such as Winter Fuel Payments or free TV licences, this would be the equivalent of cutting the state pension by over £10 a week. I do not believe that is right or fair. Suggestions that £4bn could be ‘saved’ by sweeping away these freebies are not reasonable. In fact, there are far better and fairer ways to save money if we need to and, until a more thorough assessment is made, it is right to reassure vulnerable older people that their payments are protected for the moment.

If we want to reform pensions, there are far better ways in which this can be done, which can also save money. I have suggested many times that these payments should be taxable and perhaps paid from later ages, but I would prefer to see a proper and comprehensive assessment of how we support older people in this country.

Yes, it is ridiculous to pay a tax-free Winter Fuel Payment to extremely wealthy people who may even live in warmer climes all winter, but why not make the payments taxable, rather than taking them away or means-testing them? The whole system needs an overhaul and, during the next Parliament, the Government should set up a proper review of old age support. Just taking away parts of the current system will not solve the underlying problem.

Of course it is not optimal policy to have so many add-on benefits anyway. The paternalistic notion of Government deciding how pensioners should spend money is long past its sell-by date. Government should give people a decent pension and then it is up to them to decide what they need it for.

Governments have used pensioner freebies as political vote-buyers. The Winter Fuel Payment was actually introduced by the last Government as a series of high-profile but temporary extra payments to please pensioners instead of just increasing the state pension by that amount. When they were introduced, they were not designed to be permanent but have become important to many to supplement inadequate state pensions.

Consideration should be given to rolling all the free benefits into the State Pension, making them taxable, but people could spend the money as they wished. Those pensioners who pay tax would then be taxed on the extra income, so saving costs, but the poorest pensioners would receive the full benefit. There would be savings in administration costs too.

The potential for savings to be made by rationalising and simplifying our benefit system for pensioners is enormous. At the moment, there are over twenty – yes twenty! – benefits that pensioners could be entitled to, they all have different rules and different qualification criteria, some will be payable to every pensioner, some only to older ones, some are tax free, some are taxable, some are means-tested and they need to be administered, claimed, assessed and paid.

So let’s not rush to tinker with the existing benefits system – and also take into consideration the need for social care as well as just pensions. We urgently require a proper review of the entire later life support mechanisms and design a better package of measures to support older people with the dignity they deserve.

February 24, 2015   2 Comments

Stunning improvements in UK unemployment especially for the young – don’t ignore the over 50s

17 September 2014

Over 50s are being left behind as policymakers focus on the young

Older people also need special help to get back to work and overcome ageism

Subsidised apprenticeships and retraining schemes can help

Sharp fall in unemployment: The latest unemployment figures, just released by the ONS, show a continuing picture of rapidly falling unemployment.  This is great news, however the statistics also confirm that the over 50s continue to lag behind.

Ageism in the workplace continues:  It seems Britain’s older workers are more likely to struggle to find new jobs once they become unemployed.  Improvements for 18-24 year olds have been strongest.  This confirms anecdotal evidence of ongoing age discrimination among employers and recruitment firms, and suggests that the specific focus on younger people by policymakers has had positive effects.

Measures to help the young have really helped:  Indeed, the reduction in unemployment among the 18-24 year olds has been spectacular.  The total unemployment for people age 18-24 was 23.3% lower in the three months to July 2014, than for the same period last year.  This compares with a nation-wide fall in unemployment of 18.8% and an improvement of 15% among those age 50+.

Fall in total UK unemployment May – July 2014 compared with May – July 2013:

Total                      18.8% lower

Age 50+                15.0% lower

Age 18-24            23.3% lower

Long-term unemployment is a particular problem: The situation for long-term unemployed older people is even greater.  Nationally, there has been a 15% fall in numbers unemployed for more than two years, and a stunning 27.1% fall for 18-24 year olds, but for the over 50s there was only a 3.7% fall – and in fact the numbers unemployed for over 2 years in the three months May to July 2014 were 4.7% higher than in the previous three months.

Long-term unemployment May – July 2014 compared with year ago

Change in numbers unemployed for over 2 years

Total                      15.0% lower

Age 50+                3.7% lower (4.7% higher than previous three months)

Age 18-24            27.1% lower

For the short-term unemployment there is a similar picture.  Across the country, the numbers unemployed for less than 6 months were 14.3% lower than the same time last year, but among over 50s there was only a 6.3% improvement.  By contrast, the numbers of younger people unemployed for less than 6 months fell by 18.5%.

Short-term unemployment May – July 2014 compared with year ago

Change in numbers unemployed for less than 6 months

Total:                    14.3% lower

Age 50+                6.3% lower  (unchanged from previous three months)

Age 18-24            18.5% lower

Special help for over 50s can boost long-term growth:  The Government is certainly having success in reducing UK unemployment, particularly among the young, which is clearly of huge importance.  However, I would urge policymakers to intervene with specific measures for the older unemployment as well.  There is increasing evidence that the over 50s are lagging behind in the labour market.  Many are languishing without employment because of ageism among employers and recruitment agencies.  As the numbers of older workers is rising rapidly, special measures to ensure they are not forced to finish work earlier than they need to can also boost long-term growth.

Subsidised apprenticeships and retraining courses:  The more older people who stop working before they need and want to, the worse the economic outlook for all of us will be.  Many over 50s end up giving up and retire early, but this means they will never be able to improve their income and spending power.  Not only do they lose out, so do their families and society.  I would urge the Government to consider incentives for over 50s to help them obtain apprenticeship placements, retraining and updated skills.  This can give them the new lease of life they need to rejoin the world of work.

September 17, 2014   1 Comment

Advice so that widows do not lose their husbands’ pensions

12 August 2014

It is certainly a problem that many people lose track of old pension entitlements and, especially if husbands have passed away, widows will often be left without anything from their husband’s pension unless they are aware of what his entitlement was.

If husbands have died relatively young, a defined benefit pension scheme would provide some money for the widow and a defined contribution scheme could pay out a tax free sum, but widows would need to to notify the scheme that their husband has passed away and  make a claim for their entitlement.

What can people do:

1.  Keep track of all old entitlements.  It is very important for people to keep track of their old pensions and this is vital even before you reach older ages, just in case of accidental death.

2.  Consider merging old pension entitlements together in one place so they are easier to keep track of. Ideally, people might consider moving their old entitlements with them when they change jobs or start with a new pension provider, but with old defined benefit schemes that is usually not possible.

3.  Keep a list of all your pension entitlements and latest statements.

4.  Every time you move house, notify all your pension providers of your change of address so they can contact you.

5.  Keep your ‘expression of wish’ form up to date so your pension provider knows who should inherit your pension if the worst happens.

6. Trace all lost pensions – there is a Government-run pension tracing service which can help you track down old pensions .  Telephone: 0845 6002 537.

7.  If you have lost track of an old pension, try contacting your previous employer but if the firm you worked for has merged or changed its name you will need to try to find out what happened to the company.  The same would apply if you had an old pension policy that is not sponsored by an employer but was a personal pension arrangement – your compnay many have merged with another one and changed its name, so you will need to look up what has happened to the firm and then contact the administrator of the existing company that has taken over the old business.

8.  If you are a widow whose husband has already passed away, consider writing to any past employers you know your husband worked for to ask if they have a pension scheme and if they have any record of him having been a member.  Trustees are often keen to trace former members so you could be helping them by contacting them anyway.

August 12, 2014   3 Comments

Quick Guide to the New Pensions Landscape

The table below summarises the changes confirmed today, what the system was like before the Budget, how it

works in the interim period up to April 2015 and what is planned when the full flexibility starts next April:

Policy Before Budget Interim changes up to April 2015 Full flexibility from April 2015
AGE: when you can access your pension fund Age 55 Age 55 Age 55 – rising to age 57 from 2028
WITHDRAWING SOME MONEY: The rules on taking some money out of your pension fund from age 55 If you took any money at all out of your fund, you had to ‘secure an income’ within 6 months i.e. buy an annuity or drawdown policy, otherwise you faced 55% tax You only need to ‘secure an income’ within 18 months, so technically don’t need to annuitise (though providers aren’t allowing it!) No requirement to secure an income

i.e. nobody forced to buy an annuity, can choose how much to take each year

CAPPED DRAWDOWN RULES Annual income taken out of your fund cannot be more than 120% of standard annuity (GAD) rate.  Any income above that is taxed at 55% Annual income withdrawn cannot be more than 150% of standard annuity (GAD) rate.  Any income above that is taxed at 55% No cap on income, all withdrawals taxed at marginal rate.  Existing capped drawdown policies protected and if withdrawals don’t exceed 150% of GAD rate, retain full £40,000 Annual Allowance for future contributions
TAX ON DRAWDOWN FUNDS INHERITED: 55% tax deducted from drawdown funds passing on to beneficiaries unless taken as a pension No interim changes Tax rate will be lower than 55%. Exact details to be announced in Autumn Statement 2014
CASHING-IN SMALL FUNDS: The rules on cashing in small pension funds as a lump sum from age 55 ( ‘trivial commutation’) Can only cash in and take small funds as a lump sum if:

– your total pensions are worth <£18,000

– or you can cash 2 funds worth up to £2,000.

Can cash in and take small funds as a lump sum if:

–  your total pension savings are worth  <£30,000

– 3 funds up to £10,000 each

Any size pension fund can be taken as cash flexibly, whenever you want after age 55 subject to marginal tax rates
CASHING-IN LARGE FUNDS FLEXIBLY: Rules on cashing-in large pension funds as a lump sum from age 55 (‘flexible drawdown’) Those with large pension funds can access their money flexibly in flexible drawdown and cash in if they wish as long you already have minimum lifelong pension income of £20,000


You can cash in your fund if:

– you already have minimum lifelong pension income of £12,000


Any size pension fund can be taken as cash flexibly, whenever you want after age 55 subject to marginal tax rates
TAX AVOIDANCE PROTECTION: The rules on contributing to future pensions once you have taken as much money as you want from your pension fund Once you have used flexible drawdown to access your pension savings, no further pension contributions are allowed (£0 annual allowance) – in order to prevent tax avoidance of large ongoing pension contributions Minimum lifetime pension £12,000pa

No further pension contributions (£0 annual allowance)

No minimum pension income required – all drawdown is flexible.

Allow extra pension contributions – £10,000 annual allowance [BUT can retain full Annual Allowance if cash in 3 pots up to £10,000 each or unlimited small occupational pots]

ANNUITY DESIGN: The rules for annuities – what limits on product design? Inflexible.  Income must remain same or increase every year, never fall. Maximum 10-year guarantee for ongoing income after death.  Money-back guarantee (value protection) is available but funds inherited on death are taxed at 55%.  Can’t take lump sums if need to pay for care. No interim changes Will allow variable income stream.  Will allow lump sum payments up to £30,000 (if specified at time of purchase). 10-year maximum guarantee removed, unlimited guarantees to allow more fund to pass on at death. Funds up to £30,000 can be paid as lump sum rather than ongoing income
ANNUITY SALES: Rules governing sale of annuities and information given to customers before pension fund converted to income No requirement for suitability checks before annuity sales.  No control on value for money or commission deducted at sale.  Pension providers must send information on pension fund (‘wake up pack’) around 4-6 months before pension age and again 6 weeks before and must offer an annuity.  Must inform of ‘open market option’ but no requirement to check suitability or warn of risks. Still no requirements for suitability checks, providers must inform of open market option Providers will have to provide standard information for customers to use in Guidance session.  Will have to inform customers of how to access the free Guidance – this applies to each pension pot.  May lead to ‘Pensions I.D.’ card or ‘Passport’ and eventually hope to have commonality for multiple funds all in same format
GUIDANCE AT RETIREMENT: No actual personalised guidance offered at retirement. No personal information taken into account when communicating with customers other than age and pension fund size.  Relevant questions on health, other options not asked Still no guidance Guidance Guarantee starts April 2015.  Free, impartial, tailored guidance to go through options, warn of tax implications, signpost to more information or professional advice.  Guides must not have connection with products or providers.  Will not be FCA regulated but will be authorised and approved by Treasury.  Funded by levy on all financial providers
TRANSFERRING DC PENSION FUNDS: You have the right to transfer to another provider up to one year before pension age No interim changes You can transfer at any time, including at pension age if desired (to ensure everyone can take advantage of flexible access)
DB TO DC TRANSFERS: Transfer from DB (final salary-type) schemes to DC schemes Transfers permitted for non-pensioner members.  Taking advice before transfer is only an actual requirement if transfer instigated by the employer.  Trustees have power to delay timing of transfer and to reduce value to reflect scheme under-funding but many may not be fully aware of this power No interim change All funded DB scheme non-pensioner members will be allowed to transfer to DC.  Safeguards strengthened so every member must have independent advice from an FCA-regulated adviser before transfer a pension worth over £30,000.  Guidance for trustees strengthened to ensure they know they can delay timing and reduce transfer values to reflect scheme funding level.  Unfunded public sector schemes (e.g. NHS, teachers, civil servants) will not allow transfers except in exceptional circumstances but funded public schemes (i.e. local authorities and MPs)will allow transfers
FUNDING SOCIAL CARE: No incentives to save for social care.  Capital in pension funds or drawdown  ignored for purposes of means-test, use a notional income, but no encouragement to set aside pensions or other savings for care No interim change No new incentives to save for social care, however money that remains in pension fund without being annuitized could be used if required.  The Guidance must explain issues of social care funding to increase awareness and discourage withdrawals


July 21, 2014   1 Comment

I am delighted to be Government’s Champion for Older Workers

Older workers can be the key to economic growth

Over 700,000 people may retire each year – helping them stay at work means more income to businesses and individuals

Working just one year longer would add 1% to economic growth  for the nation

I am delighted to have been appointed as the Government’s Older Workers Champion.  Having worked on the issues surrounding rethinking retirement and extending working lives for many years, I am delighted to be able to play a more direct role in this social revolution that is already underway.  I believe passionately in the value of staying in the labour market, ideally part-time in later life, and see this as an all-round positive development for society.

Individuals will have higher incomes and will therefore be able to afford better pensions.  A continuing income stream also means that their pensions won’t need to fund as lengthy a period of non-earning in later life.  Instead, those who go on working – whether full-time or part-time – will increase the potential growth of the economy as well as continue to be, and feel, valued. Too many people retire when they are still capable of making a strong contribution to society and to the workforce. The talents and experience accumulated throughout working life don’t suddenly stop being valuable at the age of 60 or 65.

Nobody should be forced to keep working, but equally, those who can benefit from staying economically active should be encouraged and enabled to do so. At each age from 50 and older there are at least 700,000 people who may stop working every year.  To put this in context, less than 200,000 immigrants come in to the UK each year.  Retirement means mean lost income to many individuals, both now and in future, and lost output to the economy.  As well as the financial implications, though, those who have already retired often miss working, not just because they have such reduced incomes, but also because they miss the social interaction, daily structure and positive feelings that derive from work.

Employers often have ageist attitudes which mean they fail to make the most of the knowledge and skills of their workforce, and challenging these attitudes will benefit businesses as well as employees. The number of over 50s will be soaring in the coming years, and it is vital that we ensure they have opportunities to earn and save more, as well as continuing to contribute to the growth of the economy as a whole.

For many years, I have been highlighting the need to consider retirement as a ‘process’ rather than an ‘event’ and to enable people to leave the labour market more gradually, by enjoying a period of part-time work before stopping altogether. Until now, retirement has often been an irrevocable step; a more gradual move will make the transition easier to manage both financially and personally. But most people are no longer ‘old’ in their 60s.  Societal attitudes are changing and staying at work for longer needs to reflect those changes and become the norm.  Just as we have redefined work for mothers with young children over the past 30 years or so, we can now redefine work for older people.

This will bring benefits to the individual and also to businesses who retain experienced staff for longer.  In addition, all of society will benefit from the additional production and income generated in the economy as well as from the health and wellbeing benefits that working longer can bring. If everyone works just one year longer, this would boost UK economic growth by at least one per cent – which is at least an extra £16billion a year.  That can offer a permanent boost to economic activity and will help both older and younger generations.  It’s a win-win, let’s help make it a reality.


July 14, 2014   1 Comment

Response to Budget consultation on transfers from DB to DC schemes

10 June 2014

Here is my response to the Treasury’s consultation on the issues relating to transfers from Defined Benefit to Defined Contribution pension schemes.  Members of unfunded public sector schemes will no longer be allowed to transfer, however members of funded schemes should be able to take their money out.  Here are my thoughts

  • Transfers should be permitted from funded DB schemes to DC schemes
  • Some schemes could benefit from members transferring small entitlements due to the savings in administration and ongoing liabilities
  • Government should allow any funds transferred to be withdrawn flexibly from DC after age 55, without restriction
  • It might be necessary to control transfers if demand is too high, for example if too many members try to transfer or one or two very large entitlements want to leave which account for the majority of liabilities
  • Trustees should be given powers to restrict or refuse transfers, which should only be permitted with trustee approval
  • There may be times when market conditions prevent transfers, or trustees may be unable to realise illiquid investments quickly so might need to restrict or impose timing constraints on transfers – like ‘gated redemptions’ or lock-up periods
  • The amount transferred could be capped or reduced to reflect underfunding of a scheme, in order to protect the integrity of the scheme and the future pensions of other members – rather like ‘Market Value Reductions’ imposed on with-profits funds
  • The situation in future will be different from that which prevailed in the past.  Until now, employers tried to encourage workers to leave, however with the new pension freedoms it could be that members themselves will want to transfer
  • Past concerns about transfers were based on fears that members might be enticed to give up guaranteed benefits and end up in inflexible and insecure DC schemes instead.  Now that members themselves may wish to transfer in order to cash their pension rights in, consideration could be given to requiring those who request to transfer (whether it is the employer or member) to pay for independent financial advice before doing so
  • Government might consider the possibility of permitting members to request that their GMP rights are transferred back to the state pension system, this could help scheme funding and also ensure a faster move to ensuring more people do receive the full flat rate state pension

Detailed response of DB-DC transfers

Question:  What are your views on the following options for DB scheme transfers?

  • No transfers allowed, as per public sector unfunded schemes

I would not be in favour of preventing transfers.  In some cases, members do need to transfer, for example if they are ill, or if they have urgent need for some funds and transfers can be in the interest of both members and the scheme itself.  It would seem unwise to allow full freedom to DC members without permitting at least some private sector transfers from DB to DC.  The funding of many defined benefit schemes could benefit from transfers especially of very small entitlements which are expensive to administer, although some controls on timing or amounts may be required.

  • Allow DB-DC transfers but then impose restrictions on the funds transferred to DC as now

I am not in favour of this option, it is difficult to see the point of permitting this.  It would not be consistent with the desire for freedom and flexibility in pensions and is unlikely to be taken up.  It seems to leave defined benefit members in a much worse position.  If they do transfer, it may well be because they need the funds or are seriously ill.  Thus, preventing them from withdrawing that money would be particularly unfair when those in DC are permitted to do so.

  • Cap the amount of DB to DC transfers allowed each year

It might be necessary to cap the amount of pension benefit members are permitted to transfer each year.  Controls could be placed on the maximum amount of pension entitlement that can be transferred out (a little like the small pots or trivial commutation rules under the previous DC regime).  The purpose of this would be to protect the integrity of DB schemes which could be compromised if too many members try to transfer out of schemes all at once.  I would be in favour of allowing trustees to limit transfers, if they feel they need to in order to mitigate risks to other members of the scheme and to the scheme’s survival.

  • Transfers have to be approved by the trustees

I would be in favour of requiring trustees to approve transfers, so that trustees can carry out their duties to protect the scheme and its members.  Trustees may need to take advice on the impact of transfers, but they should have the power to stop transfers, or to encourage transfers, albeit ensuring they can justify any decisions.  Members should have the right to apply to transfer benefits from DB to DC, but the trustees need the right to refuse such a request, or to cap the amount of the transfer, or to adjust the timing of the transfer.  It is not possible to establish a one-size-fits-all rule that would cater for requirements of all DB schemes.  Therefore, the principle of freedom and choice in pensions can be offered, but it should not be imposed on schemes which would be damaged as a result – and whose remaining members could be negatively impacted.

  • Full flexibility with no controls on the transfers from DB to DC

I would be concerned that full flexibility could be too risky.  I do think that powers to impose controls in the interest of financial stability may be required – either because of risks to markets, or to the scheme itself.  These could be triggered by trustees of schemes and their advisers, or imposed by the Regulator if considered necessary.  Providing full flexibility runs the risk of mass transfers of large entitlements which could compromise the future survival of some schemes with large deficits.  It might be necessary to only permit transfers at reduced values – below the actuarial equivalent of full benefits – if schemes have large deficits.  This would be rather like the market value reductions in with profits fund.  It might be necessary to delay transfers if investments cannot be sold to raise funds for the transfer.  It might be necessary to limit the size of transfers each year.

I also have some suggestions for further options relating to DB to DC transfers:

Pay for an IFA – I would suggest requiring members to pay for full financial advice before requesting to transfer, to ensure they understand the risks of doing so.  If members take advice and then decide to transfer, that is their fully informed choice.  Up till now, the issue of pension transfers has been from a very different perspective under the previous regime.  Until now, the issue stemmed from employers trying to entice members to leave, offering them enhanced values to transfer out of the scheme.  Under those circumstances, it was important to protect members from transferring out and then losing guaranteed benefits, in exchange for DC benefits with annuity restrictions.  The fact that employers were willing to enhance the transfer value is a clear indication that permitting transfers could improve scheme funding.  Under the new rules, however, it is quite possible that members themselves will want to transfer, due to the ability to take cash, rather than having to annuitise or use capped drawdown.  In future, therefore, permitting transfers could be in the interests of both members and schemes, however it will still be vital to ensure members’ interests are protected.  This could include requiring any member who applies to transfer out to have proved they have taken independent financial advice.  At the very least, they need to sign and confirm that they understand the risks of transferring and the guaranteed benefits they are relinquishing.

Capping the maximum percentage of scheme assets that can be transferred each year without regulatory approval – this would be designed to protect the scheme and possibly the PPF if there were some large transfers that jeopardised future scheme funding

Only allow those near scheme pension age to transfer out – for example only from age 55, the same as is allowed in DC.  This would limit the amount of people transferring, although over time as schemes mature, increasing numbers of members will fall into this category

Transferring the GMP element to the state – this could be a significant radical reform that would have a number of benefits for schemes and possibly for members.  Firstly, by transferring GMP rights back to the state, the new flat-rate state pension would be received in full by far more citizens, since there would no longer be a contracted out deduction.  The Government could consider allowing members the option of transferring their GMP rights back to the state pension system if they want to receive the full flat-rate state pension.  The assets transferred from the schemes would be a cash boost to the Treasury and removing GMP rights from the schemes could result in higher pensions if schemes would otherwise end up in the Pension Protection Fund.

Requiring the funding level of the scheme to be considered when assessing the permission for scheme transfers – It might be necessary to only permit transfers from DB to DC for schemes which have funding above a prescribed level.  The aim would be to encourage improved scheme funding, with employers increasing funding and then the scheme being able to transfer members out as funding levels increased. On the other hand, it might be helpful to permit transfers from very underfunded schemes, but with an allowance for the underfunding, so that transfers are at less than actuarial equivalence of full scheme benefits, if such transfers would actually help the funding position and prevent entry into the PPF.

Restricting transfers if there is too much demand –  ‘gated’ redemptions – It might be necessary to introduce powers for either Government, the Pensions Regulator, or scheme trustees to impose restrictions on transfers if markets become disorderly or too many members want to transfer all at once.  There could also be a case for considering whether there is a risk to scheme funding and investments, or a risk to the Pension Protection Fund, for example if large entitlements are transferred out which exceed the PPF cap.

Allowing the value of a transfer to reflect the underfunding of each scheme – like market value reductions – If a scheme is perceived to be in trouble and the employer covenant is in doubt, it might be necessary to allow transfer values to reflect the underfunding of each scheme.  Again, if members are required to receive full financial advice before transferring out, they would have someone to explain the risks to them and if they still choose to leave that is their fully informed decision.

Question 9.  Should the government continue to allow private sector defined benefit to defined contribution transfers and, if so, in which circumstances?

If the member has paid for full independent financial advice and has still chosen to transfer their benefits out, then the government should not need to specify particular circumstances or restrictions from the member’s perspective.  There may be legitimate reasons why a transfer is considered advisable for that member.  For example, if they are in very poor health, if they do not have a partner, if the scheme is very poorly funded and the employer is in danger of bankruptcy, (fears of large benefit reductions in the PPF) or indeed perhaps if they need the money very urgently and there is no other source.  There will also be circumstances in which the transfer could be detrimental to the scheme, rather than the member, so the scheme integrity needs to be considered when deciding whether to permit DB to DC transfers.  If a scheme is very poorly funded, has illiquid investments that will not generate sufficient funds in the near term to meet the redemptions, or if the scheme has cash-flow constraints that may already be hampering ability to meet pensions in payment, then members’ rights to transfer out should be curtailed.

Question 10.  How should the government assess the risks associated with allowing members of private sector defined benefit schemes to transfer to defined contribution under the proposed tax system?

The risks are relatively easy to identify but very difficult to quantify.  There are risks to scheme members – if they give up rights to a guaranteed, inflation-linked lifetime pension they could end up poorer in retirement.  The member needs to understand what is being given up when transferring, preferably after receiving independent advice to explain the risks.

There are risks to the schemes themselves, if too many members try to transfer out all of a sudden, the pension fund’s investment allocation could be compromised and some schemes are struggling with cash flow requirements as liabilities for pensions in payment increase, so sudden demands for pension transfers could be problematic.  Schemes often have illiquid investments, whether small cap stocks, infrastructure funds, private equity, hedge funds or real estate, which can all be difficult to sell quickly.

There are also, therefore, potential risks for financial assets, if schemes were to have to liquidate investments rapidly and force the asset prices down in order to sell, at times when market circumstances proved unfavourable.  Each scheme will be in a different position and the impact on the schemes themselves and the impact for the financial markets will depend on which members do transfer, when, how much is moved and what investment position the pension fund itself is in, as well as which assets the funds are moved to – or whether they are simply taken as cash.  On balance, allowing transfers is likely to be favourable for scheme funding, especially if smaller deferred entitlements are transferred.  Small accrued rights are costly both to administer and to pay, so if many of those with very low pension accruals decide to take their funds out, rather than waiting to receive just a few pounds a week in pension, the scheme funding position should improve.  The terms on which transfers are made will also be important when assessing the impact on the scheme.  If members are allowed to transfer to DC from under-funded schemes with sums equivalent to less than their full entitlements – in order to reflect the scheme underfunding in some way – then there would be a benefit to the scheme overall in the long-term.  However, if members have to transfer out only with full value, then the position of underfunded schemes could worsen.

To assess the risks, it would be important to survey schemes and their funding levels, as well as surveying members to try to gauge attitudes to transferring small entitlements.  Ultimately, there is probably an argument that transfers should only be permitted after taking independent advice, to ensure that the decision to transfer out has been understood by the member.

There could possibly even be risks to the Exchequer if people use defined benefit funds to generate extra tax relief in recycling.  This could be a significant issue.

As regards defined benefit schemes, the flows into gilts and bonds are likely to depend partly on how many schemes are considering or undertaking bulk annuity purchase, either in the form of buy-ins or buy-outs.  It is likely that increasing numbers of bulk deals will be done in coming years and either pension funds themselves or the insurance companies will increase demand for bonds as a result.  If transfers out of DB schemes are permitted freely, then the impact will depend on size of assets transferred, age of those transferring (the older those transferring, the more likely their liabilities were backed by bonds anyway) and what those who transfer actually do with their assets.

June 10, 2014   No Comments

Care crisis highlights need for incentives to encourage people to save for care


Yet another report highlighting the crisis in social care

The NHS could be bankrupted by failing to address social care properly – Government needs to introduce incentives to save for care

Minimum wage, appalling working conditions and constant cost-cutting by private firms and councils leads to sub-standard care

Integrate social care with healthcare  – why the artificial distinction?

Yet another report is released today highlighting the inadequacies of our social care system.  Baroness Kingsmill has rightly highlighted the ongoing crisis in our approach to looking after vulnerable people in this country.  Staff on minimum wage contracts, often with no security, zero hours, no pay for travel time and forced to continually cut the length of each visit cannot deliver decent care.

This is such an important issue – we will need to change the way we think about how society looks after people and also encourage saving for later life care needs – currently there are no incentives at all to encourage care saving – and the Dilnot cap will not solve the funding issues that underlie the looming crisis.

I have put in a response to the Barker Commission looking at reform of social care in England and I believe integration of health and social care is essential in order to stave off a far worse crisis in future.

Ultimately, inadequate social care could bankrupt our beloved National Health Service.  Care needs should be attended to at an early stage, which can avoid much more expensive interventions later on.

That means combining budgets for health and social care, rather than persisting with the current artificial and often arbitrary distinction between what is considered a health need and what counts as social care.  We cannot continue to leave social care in the hands of cash-strapped councils and highly indebted private providers and the Dilnot reforms of social care funding will not solve the problems that are coming down the track.

The care cap only starts when care needs reach _substantial_ so anyone who requires help with moderate needs will get no contribution from the NHS or care system to address their requirements.  If, however, doctors were able to ‘prescribe’ low levels of social care intervention, along similar lines to the prescription of medicines, this could save more expensive interventions that often result from inadequate early treatment.  Some of my suggestions include:


  • Integrate social care with healthcare
  • We need a national system of care, just as we have a national health system – currently the care system is randomly spread across the country according to local rules
  • Remove artificial distinction between healthcare and social care – if someone cannot look after themselves in some way they ultimately have a health need
  • Improve standards of training and working conditions for care staff
  • Allow GPs to ‘prescribe’ care for those with moderate needs, just as they prescribe medicines for treatment of other ailments
  • Failing to address social care is likely to cost taxpayers far more when the NHS picks up the bill for preventable accidents or illnesses that could have been addressed by social care
  • Government needs to introduce incentives to save for social care

Here is a link to my response to the Barker Commission:



May 15, 2014   2 Comments