Broken NEST egg?

I've finally received a reply to my letter urging Alistair Darling to amend the proposed NEST pension rules to allow transfers..

There follows the text of the letter I sent to Mr Darling, when he was still in No 11.

"I welcome the NEST proposals, although I do not believe for one moment that the charges will cover the costs. Whatever assumptions are being made in this regard are in my opinion on the optimistic side of heroic. My opinion is supported, by the way, by the USA experience with 401(k).

I am however especially concerned about the decision not to allow transfers in or out of NEST. This seems to run counter to everything that has been done to create flexibility for savers. I guess any employer running a Stakeholder will simply switch to NEST. This will leave the members with mostly trivial pension pots charged at 1.5% or 1% of the fund value annually. There will also be a significant number of self employed people with fairly small Stakeholder funds. The fund resulting from an investment growing at 5% for 20 years, charged at 0.3%, is 14% greater than if the charge had been 1%.

This situation arises because the not altogether irrational dislike of front end loaded charges drove the Treasury to the not altogether rational opposite of back end loaded charges.

While I agree that allowing free for all transfers in could be massively disruptive, I think the Government has a duty to the people in the original Stakeholder target market. It would be fairly easy to allow anyone enrolled in NEST to transfer in up to say £20,000 from a Stakeholder or any other personal pension.

It would be equally easy to recognise that circumstances change, and that NEST members may subsequently become much better off and want to manage their growing pension savings in, for example, a SIPP.

Transfers in would help the NEST finances in the early years. Transfers out would not happen for some time, and their impact on NEST finances would then be negligible.

Will you ask NEST to reconsider this part of the rules?

Even if NEST declines to change the rules on transfers, will you ensure that Stakeholder schemes are obliged to inform their members that staying in Stakeholder for the long term will almost certainly damage their wealth, and that they should take advice about the alternatives open to them?"

I thought this was all quite reasonable. After a two month delay I have a response from a jobsworth in the DWP that could have been written by Humphrey Appleby himself.

We spent decades getting to the point where pension savings could be moved around. Millions of people have now brought all their pensions bits and pieces together in SIPPs. Transferability works. Thus, a clear case for knocking it on the head. We are ruled by fools.

Capital gains tax

I’m much more bothered about the prospects of a flat rate of CGT at 40%, with no indexation relief. £100,000 invested over five years with the portfolio (ex dividend, which is taxed anyway) growing at 5% per annum delivers £127,628. If all the gain is taxed at 40%, and inflation over the period has been 2.5%, what comes out is, in real terms, more or less what went in. In other words, it simply isn’t worth taking the risk.

Taxes have to rise, even though any tax rise will weaken demand in the economy and so prejudice growth prospects. Then again, savage public spending cuts will weaken demand in the economy, and so prejudice growth prospects. Savers have already been hammered by an awful ten year run on the stock market, and rotten interest rates. Hammering them again with CGT is perverse, and it won’t work, because we’ll only incur the tax in extremis.

Common sense might yet prevail, but I wouldn’t count on it.

Read this article at http://www.candidmoney.com/articles/article114.aspx