Financial planning done well means that a client will be financially independent and not reliant upon the State. This means setting aside income in a thoughtful way so that when earnings cease or reduce, there are sufficient funds to provide an ongoing sustainable resource.This often involves taking full advantage of inducements to save where appropriate.

Pensions have been a political football for many years. Rules about them have never been terribly well thought through, indeed some of them can only be described as idiotic. As pensions receive tax relief they are an attractive way to invest. However, the tax relief is the only attraction about them. The previous Government introduced us to pensions simplification, which frankly was anything but simple. The way pensions operate (largely) is becoming increasingly daft – investors are restricted on the amount that they can contribute, the amount of tax relief, the size of the fund and the amount they take out and the amount that can be passed on. The auto-enrolment regime will also provide another raft of rules. This is a mess.

From April 6th 2012 the lifetime allowance (the amount that can be held in pension funds without being subject to extra tax charges) will reduce from £1.8m to £1.5m. The amount that one can contribute has already been restricted to £50,000 and how contributions are calculated for final salary scheme members (those few that remain) are also made more awkward.

Enter Danny Alexander MP, interviewed in The Telegraph is attempting to propose restricting higher rate tax relief further still and seems keen to make it very difficult for anyone earning over £100,000 to receive tax relief. Many words come to mind, but wisdom is not one of them. This is the time when backbenchers will be making their petitions to the Chancellor ahead of his Budget in March. Whilst many (the majority of the population) do not earn £100,000 and few invest £50,000 a year towards pensions, many do pay higher rate tax. The sad reality is that for anyone earning over £80,000 a year, to maintain their standard of living in retirement considerable sums need to be saved.  Suppose they require an income of £40,000 – a pension fund of £1m will be required in all probability – which clearly needs a lot of money put into the pot plus growth to get there. Yes, I know that for some people a £40,000 a year pension is very nice thank you very much, but remember that this is about creating people that are not dependant upon the State so that State taxes can be used to fund our welfare system, economic structure and so on. The Welfare State should not be shaped by those green with envy (and no I’m not referring to Kermit). Hopefully a modicum of common sense will prevail and pensions will not lose higher rate relief unless other restrictions are lifted (contribution levels, lifetime allowance), otherwise there will be little incentive to save or use pensions, which is hardly the message to be sending out prior to introducing auto-enrolment. I know the Muppet movie was released here on Friday, but one begins to wonder if they might be running a different show, though if the real Muppets were running things, I’m sure it would be an awful lot more amusing and at least we would be smiling.

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