Pensions are past their sell-by date – we need more creative thinking on long-term savings
Lets’ abolish private pensions - and encourage longer working lives
The news that the National Association of Pension Funds has asked Lord John McFall to chair an independent inquiry into retirement savings is most welcome. The current pension system is no longer fit for purpose, with the majority of moderate and low earners having lost faith in the whole pension saving idea. A pension is really just a special form of long-term savings. If we abandon the word pension for anything other than state pensions, then we can create a better new savings vehicle to revive the savings culture and provide later life income.
Pensions have disappointed many of those now approaching retirement: Many people now coming up to retirement are finding that their pension income is significantly below the levels they were expecting. Charges have been too high, investment returns have been too low and annuity rates have plummeted, leaving most private pension arrangements woefully below expectations. Lord McFall, in his role as Chairman of the Treasury Select Committee, has witnessed the problems and is well-placed to consider the issue carefully.
Millions facing pension penury: With our ageing population, the coming years will see more and more people reaching retirement and suddenly finding their income will be inadequate. There has not been enough honesty about what pensions can do.
Pensions are too complex and inflexible: Pension rules are hugely complex and the inflexibility of pensions often deters savers from paying in. The majority of people are reluctant to commit money to a ‘locked box’ where it feels as if their earnings are being confiscated from them at younger ages, they are powerless to control it and cannot get it back for decades.
People have lost faith in pensions: There have been too many scandals and too many disappointments for people to easily trust pensions now. With most households experiencing higher debt burdens, the idea of locking money away in a pension (especially for the young) often puts people off saving altogether.
Pensions great for the top earners: The very well off have benefited enormously from our pensions regime. Those with large incomes, especially those on higher rate tax (about 15% of taxpayers) can take advantage of generous tax reliefs, but the rest of the population who pay just basic rate tax are not well incentivised to part with their money. Basic rate tax relief is not enough of an incentive to offset the restrictions and complexity of pension savings.
State pension means-test undermines mass market pensions: For those on lower or moderate incomes, the operation of Pension Credit – to which half of UK pensioners may be entitled – means pension saving could be unsuitable for large chunks of the population. They may well be better off with an ISA, rather than a pension.
State pensions must be reformed to provide decent social welfare minimum: The UK state pension is also too low for many people, we have about the lowest state pension in the developed world. Government plans for improving the state pension so far fall well short of what is needed. Unless the state pension can provide an adequate social welfare minimum, without mass means testing, it will not be possible to safely save to supplement this state payment. The sooner we get a decent state pension, the better.
Pensions could be extended to include ISAs – it is important to encourage saving: The current policy of workplace saving is only focussed on the pensions vehicle. This prevents younger workers from contributing, especially if they have large debts. At the moment, employers only have to contribute to a worker’s pension, not any other savings vehicle. This means that people who are put off by the restrictions of the pensions vehicle will lose their employer contribution altogether. I hope that Lord McFall will carefully consider the merits of encouraging or auto-enrolling people into a savings plan, even if it is not a pension, so that we get people saving in some form – or helping them to pay back their student debts perhaps - even if it is not pensions. If the worker is willing to put 4% of his or her earnings into a savings account, they will currently not get the employer contribution and, therefore, be less likely to save. By taking advantage of other savings vehicles as well, we are more likely to revive the ‘savings habit’.
Why not abolish the word pension for anything other than the state pension! The public has a negative perception of pensions, for a number of reasons. The fact is that pensions are just a special kind of long-term savings, and if we manage to change their image, perhaps more people will be persuaded to save. Call them ‘LifeSavings’, provide better incentives (a matching incentive rather than tax relief?) and even attach a lottery to pensions (you are entered for a draw to win £1million if you contribute?) Then industry can come up with creative new products that allow you to save for your old age.
Financial industry wants us to believe that more savings will solve the problem – this is only part of the answer! While there is no doubt that we need to consider how to improve long-term savings, most people will simply not be able to save enough to provide a reliable retirement income unless the number of years over which they save increases substantially and the number of years during which they need to draw a pension reduces significantly. It is not realistic to expect people to save enough for, say, 30 years of working life, to support themselves at a decent level for, say, 30 years of retirement. If they save for more years and are retired for fewer years, this becomes more realistic.
Working longer is part of the solution – it’s not just about saving more: The bottom line is that pensions cannot do what people are expecting them to do. We need to wake up to financial reality before it is too late. AS people are living so much longer, they also need to consider working longer too – so that retirement does not last for so many years. Ideally, a phase of life in your 60s and 70s when you will want to work part-time, not full-time, but still be earning money to supplement your income would be the ideal way forward.
FINALLY: Retirement saving is not just about pensions – what about funding care needs in later life? While this independent Commission is considering how to fund retirement and reinvigorate retirement savings, it will also be important to examine the need for funding long-term care that is the next crisis facing us after the pensions crisis. With more baby-boomers reaching their 60s, 70s and 80s in the next two decades, we know that the need for expensive care at the end of their lives will rise sharply. No money has yet been put aside for this, so saving is not just for pensions, it also needs to build in care costs as well.
Dr. Ros Altmann
Director-General, The Saga Group