Mark Dampier: 'We're on our own in retirement. They've pulled pensions to pieces'

The responsibility for ensuring a suitable income on retirement has been passed from companies to individuals

Britain's workers are being hindered in their retirement planning despite the best efforts of pensions minister Steve Webb (Getty Images)

I started my career in financial services 33 years ago. At the time, pensions were not a big topic and rarely featured in the headlines.

In those days final salary pension schemes, which provide a retirement benefit based on your earnings and length of membership in the scheme, tended to be the norm.

Over time, however, the liabilities in final salary schemes have mounted up. With an increasing number of people reaching retirement, a lot of pension schemes are accumulating a shortfall, which the company providing the pension is required to cover.

Rising administration costs and regulatory requirements exacerbate the problem, in addition to longer life expectancy. As such, there is now not a single FTSE 100 company that offers such a scheme to any new employee. After all, as a company, why would you want unlimited liability?

Instead, private companies now tend to offer defined-contribution schemes. In this case a company still contributes to an employee pension, but it has no liability for the final amount paid at retirement.

Over the past few years, pensions have become a hot topic. For those not in the public sector, the onus has changed dramatically. The responsibility for ensuring a suitable income on retirement has been passed from companies to individuals.

For example, in addition to the amount paid by an employer, people generally need to contribute a portion of their salary to their pension. Yet most individuals do not appear to have fully woken up to this. At the moment, property is the chief source of dinner party conversation; I believe pensions will be there before long.

Given the responsibility that has fallen on individuals, it is frustrating to see how much interference pensions receive from politicians. In my view, Steve Webb, the pensions minister, has done a fine job in trying to sort out pensions over his tenure. However, in the main I think he has become frustrated by every political party, each of which seems to view the tax raised from pensions as a source of additional spending on other projects. While I generally welcome the new legislation and pension freedom reforms, it is sad to see constant tinkering going on at the edges.

A fine example is the number of pension reforms over the years affecting the lifetime allowance – the limit on the amount of benefit that can be drawn from pension schemes. Its level in the 2015-16 tax year is £1.25m, and this will fall further to £1m from April 2016.

I suspect this sum of money seems huge to most individuals, which is why there has been little outcry. Yet, similar to so many taxes, it is likely to affect many more people than initially thought. Those currently in their 30s paying pension contributions in both the private and public sector are likely to be hit by this illogical policy.

The amount that can be paid into a pension is already capped, so surely a cap on the eventual amount drawn from a pension is unnecessary. It penalises good investment performance, and it adversely affects an ageing society where health and social care are becoming increasingly costly for the government. The burden of these costs will eventually fall on to the individual, making returns from pensions ever more important.

At present, any amount over the lifetime allowance is taxed at 55 per cent; to me this seems crazy. In effect, individual pension investors are taking on 100 per cent of the risk and getting only 45 per cent of the upside.

Is it any wonder so many people are turned off pensions, given that they come with so much complexity? A pension should be simple – it is a tax-efficient savings plan set up to provide an income on which to live. Perhaps politicians from all parties should consider exactly that. In fact, pension regulation might be a bit different if all MPs had a private plan, instead of the lavish public sector pension they get now.

That said, while the Government insists on interfering, the tax benefits offered by pensions are still good. I would always suggest contributing a feasible amount to a pension – after all, no one else will be there to look after you once you've retired.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds in this column, visit www.hl.co.uk