Five radical ways to solve the pensions crisis
Is planning for retirement a thing of the past? Recent surveys suggest that far too few of us plan financially for our retirement. This crisis has been building for years and, despite well-meaning reforms, just keeps getting worse.
From 2012, the government plans to automatically enrol all workers into a pension scheme (National Employment Savings Trust or NEST) into which they'll have to contribute 4% of their salary, unless they opt out. The employer will be obliged to add 3% and tax relief will add another 1%, so contributions worth 8% of their salary will go into a pension. But will this do the trick? I doubt it.
Lack of trust
Many people simply don't trust pensions anymore, so I expect a large proportion of workers will opt out.
In fact, there's a risk that this policy could even worsen the pensions crisis, as employers will be tempted to level down their contributions to the official 3% minimum; at the moment, those that offer pensions tend to contribute more.
But for those who do stay enrolled, 8% of salary is nowhere near enough to provide a decent pension. Many people, however, could be lulled into a false sense of security, thinking their pension is sorted simply because they're in the scheme.
So what other reforms might help solve the crisis?
1. Reform state pension
One idea is to radically reform the state pension. This is currently so low that nearly half of all pensioners are entitled to means-tested benefits. But if they have private pension income, they are penalised by receiving correspondingly lower benefits. This is an obvious problem for private pension savings: if someone who saves is no better off than someone who doesn't, pensions are an unsuitable investment for them.
This disincentive is particular to pension savings because, unlike with ISAs, your money is locked away until retirement and can't be spent before you claim benefit. You usually have to buy an annuity income (unless you're in a defined benefit scheme or have plenty of pension assets), which pays out for life and will therefore mean you're penalised in the benefits means test. Reforming the state pension to remove (or minimise) means-testing penalties would address the problem.
2. Re-name private pensions
Another option is to re-name private pensions. The word ‘pension' has negative associations, due to past scandals, and many people have lost faith in them altogether. I'd prefer a clear separation between the money the state pays you in retirement and the money you receive from your private savings. Pensions should be ‘rebranded', so that only the state pension would be called a ‘pension' and private savings would be seen as what they are – simply private savings for later life, but perhaps with a catchy new name.
3. Make pensions more flexible
It could also be an idea to change the nature of pensions. Making them more flexible - for example, allowing early access to at least part of the pension - would encourage more people to contribute in the first place. The thought of having their money ‘confiscated' for many decades, with no access to it even in an emergency, often puts people off pensions. Why not allow them to access some of it – for example, their own contributions (normally about half the fund) – but not the tax relief or employer contribution, which would be left to grow until retirement?
4. Make pensions more fun
Also, if pensions were more fun, perhaps more of us would engage. Most of us know we should save, but being lectured about it doesn't exactly encourage us. So, for example, how about introducing a lottery prize of £1 million every month? With a pension lottery prize draw, you would still have your money, would get extra from tax relief or even employer contributions, and would also have the potential of investment returns.
5. Encourage working longer
Finally, people should be encouraged to work for longer, so that it won't be necessary for their pensions to replace all their earned income for quite so long. It's great news that we're living longer, but to maximise the potential benefits of a longer lifespan, we need a radical rethink on pensions.
Dr Ros Altmann is the director general of Saga, and a pensions crusader. Email her at email@example.com
A test to assess the financial “means” or resources (income, savings, property) of a person to determine whether or not that person is eligible for financial assistance (such as state benefits, legal aid, free prescriptions, etc) from the government. A means test can also be used by the courts to determine whether or not a person is eligible to enter bankruptcy proceedings or if they have the means to repay their debts to their creditors.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.