Bold steps such as 30 per cent tax relief for all are needed to broaden the appeal of saving for retirement, says Paul Goodwin, head of pensions at Aviva
Reading is good for you. In the five minutes you take to read this article, it is probable that your life expectancy will increase by about a minute.
Working is good for you. As you fight your way through the next working week, remember it is probable that your life expectancy will increase by about a day.
Much has been written on the subject of our increasing life expectancy. Type “increasing life expectancy” into Google and you will receive over 14 million hits. Much has been written on the challenge of paying for our longer lives. We understand that 41 per cent of people are saving too little for retirement. Proposals put forward by the Turner report have featured in the pensions debate since 2002, and last month, George Osborne propelled the subject back into the headlines with his proposal to bring forward by 10 years the planned increase in retirement age from 65 to 66.
It has been claimed that Britain’s pension system is the most complex in the world. Improving clarity and understanding must, therefore, be a first step towards encouraging greater public engagement. This is our over-riding belief.
Simplifying the state pension is central to this. Let’s first look at the state pension. Aviva research shows that 63 per cent of the public view the state pension as their first or second source of income in retirement, but 68 per cent of this same population overestimate or don’t know the pension’s value. In short, we know it’s important but we don’t know how much it’s worth. How can we plan on such shaky foundations? Surely we all have to accept that the state pension needs to be simplified and clarified.
State pension credits were introduced in 2002 and have done much to support the poorest in retirement, but they are adding confusion to the system. The application process is lengthy; their existence can act as a disincentive to save and it is feared that up to one-third of the 6 million entitled are failing to claim.
In the spirit of simplification, let’s debate the replacement of pension credits with a flat state pension of £130 a week for all, paid for by a new, scaled system of National Insurance contributions for those above a certain income in retirement. Not the most popular solution, but if there are better ways, let’s debate them.
Let’s also do more to educate people on how much they can expect from the state in retirement. Today, the Pension Service responds to about 400,000 individual state pension forecast requests every year. Although, encouraging, this represents only about 1 per cent of the working-age population.
The introduction of personal accounts has the potential to bring pensions to a new audience of 9 million savers. Could the personal accounts “annual statement” be enhanced to include a forecast of the individual’s state pension benefits at retirement?
By taking advantage of an already planned communication channel, this reform would increase the educated audience to about 24 per cent of the working-age population – directly benefiting those most in need.
Turning to private savings, people understand that pension savings benefit from tax incentives, but our research suggests that a staggering 83 per cent do not understand the tax benefits they can receive.
I also believe that a simpler, harmonised rate of tax relief (for example 30 per cent) should be adopted to replace the current confusing two-tier, higher and lower-rate system.
This change would immediately benefit and encourage the 85 per cent of people who are basic rate taxpayers, and could add over 14 per cent to the value of their pension at retirement. This change would deliver a simpler system with more incentive for those most in need.
Pension saving must also be updated to reflect the needs and lifestyles of today’s customers. Asking people to lock away their money for thirty years is an increasingly alien concept. Indeed, four in five people manage their money within a time horizon of one year or less.
I believe that customers should be allowed to access a portion of their savings before retirement – removing the current psychological barrier to long term saving.
These possibly provocative ideas have the potential to make pensions simpler, introduce much needed flexibility, and encourage more to save for retirement – particularly those most in need. Change will not be easy, but it’s what customers expect.