Five radical ways to solve the pensions crisis

Last updated: Feb 1st, 2012
Feature by Ros Altmann

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 columnists@moneywise.co.uk

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Talk about a pendulum. TRS (Ilinois, USA) without encouragement sweetened the retirement as recently as 2000 with the 5+5 plan. The idea was to in the long run save the state money. Of course, the state continued to under fund the deal. Work longer? I had to leave at an early age or LOSE money according to the system. The state wanted me out. Now these pundits say pensions are out of control. Who set up TRS? The state. Out of control? NO. TRS is going fine as it is without further contributions. 6.9 billion in and 3.9 billion out. Any reform where contributions go to a 403 will take money away from TRS and that MIGHT cause it to be unsustainable. So, there is a fix for a problem that does not exist. The fix might just cause a problem. The real problem is the unfunded liability, or mortgage. With that on the books, the state can't borrow more money. That is the problem. I know you are in the U. K., but the problems are the same.

Remove Gordon Brown's gold plated government pension benefits (which we are paying for) as he did so very much to damage our pensions. Let him live on the standard state pension like so many of us have to do, he could be a shining example to us all! It would also be a warning for politicians yet to come to consider their own position before spoiling other people's pension arrangements.
He also spoilt Stocks & Shares ISAs for working people and now it is only folk on 40% tax and higher who find them worthwhile. Some socialist he was!

Point 3:

In Singapore, you can make mortgage payments from your pension fund, thereby encouraging the young to save by investing in the property in which they live. Downsizing in later life will fund retirement.

rename private pensions! What sort of game is that? Don't we have enough lack of straightforwardness at present? The person who wrote point 2. on your list needs kicking off your site! As it is, you need to strengthen the content of your site, because it is getting more and more flimsly - I guess like t he rest of us you don't know what's coming.

Sorry you have left out the major reason why people don't like to put money into a pension. The biggest disincentive is the fact that once you die all the money in your pension pot goes to the pension company rather than returned for your dependants/partner/children. This is the reason why I will never put money into a private pension. My Dad saved to buy AVC's for many years, often going without on the basis that he wanted to look after my Mum when he died. Unfortunately due to taxation she would be better off without them.

I believe that I read somewhere that what ever your age is when you start saving in a pension plan, that to receive a reasonable pension(ie one you can actually live on). You should contribute your age as a percentage of your salary. So an 18 year old saves 18% and a 40 year old saves 40%. Therefore 8% is no where near enough to produce a realistic pension, even if you started at 18.
Whilst it will produce some pension, probably just enough so that you are unable to claim any benefits.

It is difficult for women to work longer until retirement where they have caring duties for elderly parents and/or grandchilcren

Council workers are getting £4000 per annum in pension. Whats the point in them saving and then being told they are getting gold plated pensions when the MP's have a PLATINUM pension which should come under the same scruitany as everyone else.

The basic need for change is a change of attitude. Those that have not worked should not expect the rest to bail them out when it comes to old age any more than they should be receiving long term benefits when they are younger.
Some of the ideas nonsense. Whilst flexibility in pension provision, a facility for partial draw down to coincide with part time work in later life would be a positive contribution introducing a lottery just reinforces the something for nothing attitude that exists today, and rebranding is just a con.
Apart from the increase in the number of the reckless and feckless, who have been brought up to expect that the state should look after them and that it is "not their fault ", the financial industry and the employers must share the blame for poor pension provision. Employers have been allowed to take contribution holidays when returns on investment were good and investment charges have creamed off the profits that should have been used to pay out the pensions that the workers were given to expect. In addition, the Government of the day has failed to address the pension issue by not reforming the state pension at an earlier stage. An increase in inheritance tax should also ensure that older people down size their house to supplement their own living costs and not expect the state to pick up the tab. The welfare state was meant to be a safety net not a long term way of life.

A further issue is the level of interest paid on your savings. It is abysmally low and the rate of inflation is soaring!

Getting a good pension was one of my priorities in 1964 when I started work. It was due in no small measure to seeing how the welfare state had helped(!) my father when he was temporarily out of work. I schemed and saved and got a decent pension and back up savings only to discover that the state intended a) to tax me to death, and b) to rob me of my savings value.

Given my time again, I doubt if I would bother!

They also seem only too willing to hand out my tax money to foreign adventurers. The reason according to one governement minister is to avoid terrorists. He clearly failed to go to school. It used to be called Danegeld and failed to work until Alfred put a stop to it!

"encouraged to work for longer" ! I don't need that encouragement. I have worked all my life, and now I've been made redundant I'm finding it hard to find another job due to my age (junior jobs require you to have just left school or college, and senior jobs don't seem to accept that you could ever be out of work even if it's through no fault of your own!).
I'm prepard to work 'til I'm unable to work whenever that might be - and if someone would employ me at the grand old age of 49 that would be a start !!
Totally agree with Recrec as I'm not entitled to any benefits (even though I've paid taxes all my life), have to live off my savings (which were intended for old age) and by the looks of things I'll have nothing if I ever do "retire". So much for working hard and doing things the "right" way .... I wish you young'uns the best of luck !

Some employers may have given their staff a 4% rise next year on 1/1/12 as a cost of living rise but now they know they have to fund a pension with 4% they could just cop out of a pay rise altogether!! This robs employees of choice.

Rename private pensions: I agree in the sense that putting money into savings to fund your retirement is not a pension. A pension is what you need when you retire. Retirement Savings Accounts (RSAs) would be my suggestion. It should have a simple set of rules to encourage investment similar to an ISA, with tax rebates on investments, tax free growth and no tax on dividends or cash interest withi the account. In return all withdrawals should be treated as personal income and taxed accordingly. This would be a disincentive to withdrawing money while earning, but as soon as you stop earning you can withdraw your personal allowance each year tax free - currently £9,940 for a 65 year old.

Having contributed to a pension for the last 30+ years, I have now seen my drawdown pot halved at 67 years of age. My advice to those just starting out on a career, save the maximum you can afford in an ISA every year until you retire, it's tax free and you can shop around every year for the best rate. When you retire enjoy your savings, the trick is knowing when to spend your money while you have the health to enjoy the fruits of your labour.

The other major problem with pensions is the return seems to be at the behest of the provider. Just like utilitiy companies NOT putting prices down when the wholesale prices fall, so it is with pension companies and their 'returns' on the stock market. Whilst I can understand the need to cut when returns fell years ago is it realistic that now the market has recovered (albeit falllen back a bit now today) that on some pensions NO return is being given whatsoever. There should be at least some statuory return for people even if it only matches inflation.

One of the benefits of saving into a pension is that you can't access it until retirement! Therefore you can't access it when unemployed, and can claim benefit if your income is low enough.

This simple approach is good.
Restricting withdrawals to what has been paid in by employee/employer/tax rebate will only complicate matters.

What is wrong with a high rate taxpayer paying in £60k = £100k RSA
Then drawing out (say) £10k pa and paying tax on that as necessary?

If the aim is to make pensions (whoops!! sorry.... RSA's) more attractive... this is what's needed.

How about a Govt backed RSA scheme too ... paying RPI+1% on up to £200k?
Give people confidence that their RSA monies will not be wiped out by some disaster.

It's actually half your age that you are encouraged to save for your pension.