In the UK this is not so much a risk as a reality. The National Association of Pension Funds (NAPF) has urged MPs to rethink changes announced in the Budget on removal of tax relief of employee contributions. The NAPF points out that whilst these proposals are directly aimed at the UK’s 230,000 highest earners, the impact is likely to be felt by more modest earners in the medium term. According to the Sunday Times Britain is already on ‘pensions strike’ as savers fear that continued removal of tax relief will be too tempting for a government that has maxed out its credit and credibility.
As NAPF says the Budget proposal will break a long-established principle on which UK pensions have been based and also snap the tax simplification framework, introduced by this Government in 2006. More than threequarters (77%) of employers surveyed by Pricewaterhouse Coopers said that the Budget’s pensions tax proposals had further reduced their motivation to provide workplace pensions, whether defined benefit (DB) or defined contribution (DC). Only 4% were not planning changes to the pensions they provide as a result of the Budget.
Savers and the industry can justifiably ask where all the piecemeal public policy on pensions is taking us? Increasingly it looks very much as though the destination for most workers in the private sector will be shorter and meaner retirement, if they can afford it at all. The incentive to save for retirement is greater than ever but the disincentives are also piling up.
Respondents to a Friends Provident survey estimate that £832 a month is a realistic amount of money needed to live on comfortably but this figure does not allow for mortgage repayments or rent. The state pension currently provides less than half of that. People reaching retirement age today have more financial responsibilities than previous generations because of increased longevity and higher expectations. At least a fifth (18%) of retirees are still paying their mortgage and our research indicates that 57% of retirees also have parents who are retired. A third of these are supporting their retired parents financially or expect to do so in the future.
According to the latest figures from the Department for Work and Pensions an estimated 1.4 million pensioners are working after retirement age and the numbers will rise a great deal further before the proposed pension eligibility age of 68 is reached in 2046. And UK employees have longer working weeks than their counterparts in the rest of Europe. Full retirement will become a diminishing dream for many.
Strange then that when the OECD reports that, in five OECD countries including the UK, private retirement savings (for current retirees) make up more than 40% of retirement incomes that the government isn’t doing more to ensure that the incentives to stay with pensions outweigh the disincentives.
People need pensions, is the title of a recently launched ABI consumer leaflet aimed at encouraging people to stick with retirement saving. What we’d like to see is similar encouragement from the government. As the OECD report states: “It remains necessary, in spite of these pressures, that governments take steps to ensure that public policies deliver a retirement-income system for the long term that is secure, adequate, financially sustainable and economically efficient”.
1 Pensions at a Glance 2009, Retirement-Income Systems in OECD Countries, OECD Publishing 23 June 2009
2 Pensions shake-up? PwC survey of 157 companies following Budget 2009, June 2009
3 £832 (average amount considered enough to live on comfortably each month –Retirement – Standard Report Q3)
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