Simplification is the key - Centre for Policy Studies

2. THE SAVER’S PERSPECTIVE
2.1 Certainty
As we age, we increasingly crave certainty, particularly in respect of retirement income.
But the price of certainty, in the form of DB pensions and annuities, is rising with
increasing longevity and dismal investment performance. Prevailing low interest rates
exacerbate the problem. Annuities do provide a hedge against longevity, but in recent
years prices have risen substantially, not least because the FSA (and the industry) has
realised that life expectancy has been under-projected for decades and its expectations
for reserves have now been raised. But annuities also introduce uncertainty because the
saver could die prematurely (actuarially speaking) and then fail to get full value from the
asset, although some providers do now offer money-back guarantees in event of early
death (but they do not come for free).
2.2 Balancing simplicity and choice
Experiments confirm that, for most of us, the less choice we have, the simpler life is, the
better we feel and the more empowered we are to make decisions. Excessive choice
can lead to paralysis rather than liberation; it is overwhelming, and often prompts
“consumer vertigo”. When swamped with too many options, we procrastinate and cannot
make a decision, or become rushed and make poor decisions.
In the UK, there is a perplexing array of long-term savings products which savers are not
always equipped to rationalise. Each product offers different attributes that make it hard
to compare with others but, ironically, as product choice increases, expert advice
becomes less available and more expensive. The commonly-held view is that if the
savings landscape were simplified, we as a nation would save more.
2.3 Tax: the root of much complexity
Tax is the root cause of our retirement saving complexity, a huge issue in respect of
asset accumulation and post-retirement decumulation. Table 6 details the different tax
treatments of five established long-term savings products.
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