Pensions tax treatment has become ‘schizophrenic’ due to the ringfence around pensions breaking down, PMI president Kevin LeGrand has stated.

LeGrand recommended ringfencing £20,000pa from a member’s pension pot to provide a personal income at retirement, either via drawdown or an annuity. Any additional money in the pot could be spent however the member wishes.

This approach would encourage savings in a tax-efficient manner above the minimum, LeGrand said, and provide a retirement income of around two thirds of national average earnings.

Speaking at the PMI Annual Dinner last night, LeGrand said: “I think we have lost our way of late, and current policies evidence a degree of schizophrenia, arising from changes in the tax treatment of pension arrangements. This, I suggest, has been facilitated by the breaking down of the ringfence that formerly existed around pension arrangements.”

The traditional justification for tax relief on pension savings was that it is a prudent social policy to encourage private funded pension provision, which reduces the burden on the state, he explained.

However, “recent policy has been to break down the unique situation of the funded pension scheme and to regard it as just another savings arrangement”, making the justification for tax relief less relevant.

Early research after the freedom and choice reforms suggests that a high proportion of retirees are attempting to use their pension pots “for the purpose for which they were originally intended”, LeGrand added. “However, not all are, and in the absence of any restrictions, future priority on securing retirement income cannot be taken for granted.”

Also, LeGrand said enabling auto-enrolled members to save at a lower rate than the minimum contributions would be preferable to having to opt out completely and lose employer contributions, and “would be better than nothing for the poorer members of society”.

Further increases to the minimum contribution rates above those already enshrined in legislation need to be considered as a “matter of urgency, given the long lead times required to phase in any new requirements”, he added.

The PMI awards were presented at the dinner. Work and Pensions Select Committee chair Frank Field received the Outstanding Contribution to the Pensions Industry award – just one day after his efforts helped secure Sir Philip Green’s £363m cash settlement with The Pensions Regulator.

The event also saw Mike Abrams of Smiths Pensions win the Outstanding Contribution to the PMI accolade.

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