Time to wrest control of our pension pots from politicians' grasp

As expectations of retirement income take a turn for the worse, Andrew Oswald offers a few ideas for reversing the trend

May 5, 2011

Credit: James Fryer

If you felt a stab of pain at midnight on 5 April 2011, it was not the Merlot. It was because your future wealth fell substantially. The amount depends on your age, but for concreteness let's call it about 15-20 per cent. Whether you are drawing it now or will eventually, your retirement income from the Universities Superannuation Scheme (USS) was marked down. University pensions will no longer be indexed to the famous retail price index (RPI) but rather to something called the consumer price index (CPI).

The problem with the CPI is that it rises too slowly - on my calculations, at about 1 per cent less each year than the RPI. One reason is that the CPI ignores most of the cost of housing. Another is that the CPI is not a normal arithmetical average where things are added up and divided by the total number of items, but rather a geometric average (the idea that you can average x and y by multiplying them together and then taking the square root of the outcome).

My purpose here is not to complain or to take the union's side in the current pensions dispute. I do view the change as unethical: for the past 30 years I have stored in a grey filing cabinet many USS documents promising that my retirement income will be indexed to the RPI. It would not surprise me if someone ends up taking the issue to the courts, perhaps the European Court of Human Rights. But here I want to think about what you and I might instead do.

We can act on the long-standing idea that one should diversify one's assets and that the bastards out there will try to get one's cash if they can (at Warwick we tend not to use those exact words in the first-year economics lectures).

How can one buttress oneself from future attacks on assets? First, all Britons have the right to open a personal pension. These can run alongside, or instead of, USS. They offer fantastic tax breaks, yet the tax advantages of USS pensions have just been reduced. You can even withdraw entirely from USS if you wish (although for most university staff this is unlikely to be ideal, and USS, for the record, has been run pretty well through the years).

Most university staff who choose to pay in, say, £10,000 a year to what is called a self-invested personal pension plan (SIPP) will get a tax break of 40 per cent, so it costs only £6,000.

Better still, when you get to 55, you can take out the 10 grand at any time and one-quarter of it will be entirely free of tax. At that point you will pay tax only on the remaining £7,500, and if you are by then on a lower income post-retirement, you might get the extra benefit of being able to pay only 20 per cent income tax. This is a bargain. There are also now plenty of inexpensive SIPP providers (type "low-cost SIPPs" into Google). RPI-indexed annuities can be bought.

I do not expect these extreme tax breaks on personal pensions to last; eventually the government of the day will realise that, as with individual savings accounts (ISAs), these things are helping the middle classes salt away cash by the bucket. But I reckon we have a decade or so before politicians twig and extinguish these tax breaks. Moreover, it is unlikely that a government will claw back that pot of personal-pension money. A large constituency of elite private-sector workers have put money into them. Such individuals are a formidable voting bloc.

Another useful twist is that universities will soon be allowing productive people to work until their 80s. New kinds of work contracts are going to spring up. Research assessment exercises of one kind or another are likely to be with us for the rest of our lives; they suit the mindset of politicians. Our universities ill figure out that it is sensible to snap up on one-third time a greying professor if she can still whizz out a good journal article every year or two. Personal income streams will become more diverse.

In the future it will be rational to be less dependent on organisations such as the USS and to act more and more like highly skilled, highly mobile freelance workers. Tax breaks that are too good to be true routinely disappear; yet they take time to do so.

Brainpower remains our principal asset. It is untaxable.

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