Pensions expert JOHN FINNIGAN says action is needed to ensure that the mass population is able to enjoy a comfortable retirement
Research released by National Employment Savings Trust (NEST) earlier this year highlighted that very few people think pensions are 'straightforward' (six per cent), 'easy to understand' (four per cent), or ‘simple’ (three per cent).
The words people more strongly associate with pensions are 'confusing', 'complicated' 'boring', 'difficult' and 'off-putting'.
The UK Government has now signalled intentions to introduce a new kind of pension model that would give more security to retiring workers - the so called, "defined ambition" pension where the risks and uncertainties are more evenly shared between employer and employee.
One example is the so-called "cash balance" scheme, where the firm guarantees to deliver a fixed pension pot on retirement and the employee then accepts the insecurity of not knowing how much pension that pot of money will buy.
Another model is to share the uncertainties of rising life expectancies, so that firms pay a guaranteed pension but the date on which that pension is paid can change if people live longer than expected.
Whilst the Minister for Pensions, Steve Webb, should be commended for attempting to address the pension deficit and show innovation within the pensions market, the defined ambition proposal will only add to the confusion. This will do very little to encourage workers to save appropriately for their retirement or simplify the process.
Furthermore, many small firms will be greatly concerned by the prospect of the defined ambition pension, and the potential costs associated.
By 2018, under the NEST (an auto-enrolment scheme for those without company pensions) each employee will be required to contribute 5% of their income to a pension, with the employer contributing a further 3%.
The employee will receive tax relief on their contribution, meaning that under current tax rates this will have a net cost of 4%, with 1% coming via basic rate tax relief.
It's clear that something needs to be done to ensure that the mass population is able to enjoy a comfortable retirement.
If the Government wants to make meaningful change, it should increase the employer contribution to NEST by a couple of per cent. It would be cheaper for the employer than a defined ambition scheme and would benefit the worker significantly. The opt out option of NEST should be removed to guarantee that every working individual has a pension.
The Government must also look at making pension tax relief fairer. The disparity between the 40% and 20% on pension tax relief is clearly unfair. A mean average rate, applied to all pension contributions would help those at the lower end of the earning spectrum to save more.
The pension is, to most individuals, the most important pot of money that they will ever have control over. Whilst there are tales of woe from those who feel they have been short-changed by their pension, a pension is not a bad investment. A pension can be a great investment, but it must be managed well.
Is your pension in the right place and is it performing? Do you know where your pension is invested and how high risk an investment it is? A startling number of those who have a pension would not be able to answer those questions.
People must take responsibility for their pension pot, after all it's their money and their future at stake. The complicated system means that many don't take responsibility, and could ultimately be losing out.
At the same time, millions of UK workers are not paying a penny into a company or private pension. The Government needs to do more to incentivise saving, particularly for those at the lower end of the earning spectrum, so that individuals are able to provide themselves with an income adequate for retirement.
The current system threatens many people with an insufficient retirement income, but adding further complications to the system won't address this issue. The UK's pensions market must be simplified to encourage people to save and manage their investment well.
If Scots are to enjoy a secure and comfortable life after they stop working, they will have to reach more deeply into their pockets and simply save more and manage their savings better. The consequence of us not getting this right will impact on every future taxpayer.
John Finnigan is director of financial planning for Innovate Financial Services
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