Simplification is the key - Centre for Policy Studies

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INTRODUCTION There has been a flood of reviews of different aspects of the governance, operation and structure of the pension savings system, including reports from such eminent figures as Cadbury, Higgs, Myners, Penrose, Pickering, Sandler and Turner. This is indicative of successive governments wrestling with a simple, crucial question: who pays? To date, the answer has largely been the working population. But this inter-generational wealth transfer is unsustainable (and unfair). Our aging population is often cited as the main concern, but the deterioration of the pensioner support ratio 14 has largely been arrested by sending the State Pension Age (SPA) into retreat (to 68 by 2046). However, this is unlikely to fix the problem, and may well prove to be simply a re-labelling exercise. The real issue may be that most people in their 60s could be living in an income desert, dependent upon benefits because they are unable or unwilling to find work. 15 Whether or not they are categorised as pensioners is largely academic. Ineligible for the State Pension, they will need some other income source. Once the SPA is reached, the low real value of the basic State Pension 16 means that those without savings will be increasingly dependent on means-tested benefits to make up their income. Indeed, the less savings they have, the greater the incentive not to save because of the loss of means-tested benefits. In addition, the deterioration in the quality of (private sector) occupational schemes will diminish what has historically been a crucial source of retirement income for many people. There is also the ongoing problem for many women, in particular, who, because of their intermittent work patterns, have not accumulated a meaningful pension in their own right and find themselves inadequately provided for when they become widows or divorcees. 14 15 16 The pensioners support ratio is defined as the number of people of working age, per pensioner. Today, across Europe, only 50% of people are still employed at the age of 60. The European Commission, The 2009 Ageing Report, 2009. Notwithstanding the Coalition commitment to return to earnings-indexation from April 2011. It would be prudent to question the viability of this proposal. 1
Reference to “the pensions crisis” is not so much a reference to today’s pensioners as today’s workers, when we come to retire. Unless the retirement age is pushed back much faster than currently planned, the alternative is an increasing tax burden on the future working population; a serious political challenge. It seems inevitable that today’s workers will have to rely more on sources of income other than a pension (state or otherwise), but savings levels are simply too low to meet their retirement income expectations. Consequently, saving for the long term has to be made easier, but the challenge should not be underestimated. Attitudinal, behavioural, informational and structural barriers seriously inhibit retirement saving. Many people lack the necessary financial understanding to make informed decisions, or have difficulty accessing information. Financial myopia (“spend now”) is commonplace, particularly understandable amongst those on low incomes whose behaviour is more influenced by immediate deficiency rather than the prospect of distant, and uncertain, future reward. 2
Page 1 and 2: Simplification is the key Stimulati
Page 3 and 4: THE AUTHOR Michael Johnson trained
Page 5 and 6: A note concerning data Finding a co
Page 7 and 8: These proposals depend upon having
Page 9 and 10: SUMMARY The UK’s long-term savin
Page 11 and 12: any annuitisation requirement, prov
Page 13 and 14: Thus, had pension savings products
Page 18 and 19: PART ONE: THE LONG-TERM SAVINGS LAN
Page 20 and 21: Japan’s savings ratio was once th
Page 22 and 23: scheme contribution rates are lower
Page 24 and 25: Table 1: Funded pension scheme asse
Page 26 and 27: 1.9 The international perspective A
Page 28 and 29: Table 4: ISA savers’ income distr
Page 30 and 31: Table 6: The complexity of the tax
Page 32 and 33: Figure 4: Income options upon retir
Page 34 and 35: savings by delivering a framework t
Page 36 and 37: Figure 7: When non-savers might sta
Page 38 and 39: There are other aspects to consider
Page 40 and 41: 3. THE EMPLOYERS’ PERSPECTIVE 3.1
Page 42 and 43: When employees with DC funds retire
Page 44 and 45: More specifically, employers are no
Page 46 and 47: Both businesses do have important c
Page 48 and 49: year. 91 Clearly, there are conside
Page 50 and 51: elderly and the wealthy, not least
Page 52 and 53: 5. THE TREASURY’S PERSPECTIVE 5.1
Page 54 and 55: Whilst the UK’s NRR for the mean
Page 56 and 57: Currently, reducing pensioner pover
Page 58 and 59: Table 13: Net cost of tax relief un
Page 60 and 61: TEE would be hugely attractive to p
Page 62 and 63: 5.6 Tax treatment: international pe
Page 64 and 65: PART II THE PROPOSALS AND THEIR IMP
Page 66 and 67:
Proposal 6: post-retirement, amend
Page 68 and 69:
7. TAX SIMPLIFICATION: SOME OPTIONS
Page 70 and 71:
8. THE IMPLICATIONS FOR SAVERS Impl
Page 72 and 73:
The higher rate taxpayers’ perspe
Page 74 and 75:
segregated from any employer-sponso
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epresent a further step down the pa
Page 78 and 79:
10. THE IMPLICATIONS FOR THE PENSIO
Page 80 and 81:
Such principles would have to ensur
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Figure 13: The cost of pension savi
Page 84 and 85:
pool of underlying pension assets (
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hardship” facility, whereby cash
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occupational pension scheme benefit
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CONCLUSION We would save more, for
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ACKNOWLEDGEMENTS This paper was cat
Page 94 and 95:
APPENDIX I Summary of proposals fro
Page 96 and 97:
APPENDIX II Value of assets in priv
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depending upon age at the time that
Page 100 and 101:
APPENDIX V PRE-RETIREMENT ACCESS TO
Page 102 and 103:
APPENDIX VII FINANCIAL PLANNING TOO
Page 104 and 105:
APPENDIX VIII THE MODEL 173 The
Page 106 and 107:
GLOSSARY Alternatively Secured Pens
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pensions and earnings, but excludes
Page 110 and 111:
those with earnings above £4,940 b
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in cash terms, i.e. fixed at £770
Page 114:
The UK savings industry is barely t
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