Expect more tinkering with pensions

Last week, the Centre for Policy Studies (CPS), a leading think tank, proposed that we should abolish the state pension in its current form. The suggestion is likely to fall on deaf ears, but it underlines how fluid the UK's pension system really is and why assuming the current rules will remain in place could prove to be a mistake.

The CPS's new paper argues that the state pension in its current form is unaffordable and should be dropped with effect from 2020. Instead, it suggests a higher state pension payable from the age of 80, while those aged between 65 and 80 would only be eligible for means-tested benefits. The CPS also thinks people should be encouraged to save through workplace individual savings accounts (Isas), subsidised by the government and employers, rather than being required to make national insurance contributions.

Former pensions minister Ros Altmann said means-testing in the state pension system represented a disincentive to saving. The "proposals are truly dangerous", she warned. "[They] would add back more complexity for the public and... are unfair and socially damaging." The Department for Work and Pensions also shot down the idea, pointing out that it has only just overhauled state pensions, with the introduction earlier this year of a new flat-rate benefit to replace the previous two-tier system.Still, more tinkering to the pensions system is almost certain at some point.

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In particular, savers can't be confident about when they'll be able to claim state pension benefits, the continued availability of tax breaks on private pension contributions, and how much freedom they'll enjoy to make withdrawals from their savings during their retirement years.

For example, government plans to raise the state retirement age were first announced in 1995 and were subsequently accelerated. There are now plans for a review every six years. Similarly, successive governments have discussed reducing the tax relief on private-pension contributions, while caps that hit higher earners have become progressively less generous. There have also been calls to roll back some of the pensions freedom reforms introduced in April 2015.

So how can you save for retirement in a way that protects you from changes of government policy? While there are no certainties about the pensions system, this isn't an argument for steering clear of pensions altogether. You don't have that option with state pensions, and private and workplace schemes still offer generous tax benefits that it would be a shame to lose. However, you must not assume you'll continue to be eligible for these benefits until you retire, or that you'll be able to draw your benefits at the same age as you would today.

So it's prudent to make additional provision for retirement outside the pensions system. This can kick in to cover shortfalls and gaps as required, or simply to boost your retirement income. Your aim should be to maximise your flexibility through savings that give you room for manoeuvre as the system evolves. Consider Isas, which offer similar tax efficiencies to pensions, but look less vulnerable to reform. But it may also be wise to make some provision for retirement through less tax-efficient savings vehicles.

While the lack of tax perks may reduce returns, assets held outside a tax wrapper are less likely to be restricted by future governments, so you can be more confident about being able to draw on them at a time of your choosing. Equally, be open-minded about the timing of your retirement. Consider whether you should plan for working longer than expected perhaps on a part-time basis until all your pension savings become available.