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Have your say on the future of pensions

The UK Government is asking for our opinion on the future of pensions. It apparently wants to know how to incentivise people to save more for longer so we don’t wind up with an OAP underclass that hangs around post offices all day and shakes down youngsters for their pocket money.

The deets are in this consultation paper on pension tax relief reform.

Feedback is requested from engaged individuals. That description certainly fits the Monevator massive, so I’m going to sling in my two pennyworth in this article and I’d love it if you could add yours in our comments thread.

I’ll then bundle up our collective response and send it to HM Treasury, 1 Horse Guards Road as the Monevator community’s contribution.

That’s surely worth at least four pennies in anyone’s money!

Shaping the future of pensions

Because our golden years are stretching out for longer, the government wants pension reform to fit the following principles, as laid out in the paper:

  • It should encourage people to save enough during their working lives to meet their aspirations for a sufficient standard of living in retirement.
  • It should enable individuals to take personal responsibility for ensuring they have adequate savings for retirement.
  • It should be simple and transparent… Greater simplicity and transparency may encourage greater engagement with pension saving and strengthen the incentive for individuals to save into a pension.
  • It should build on the early success of automatic enrollment in encouraging new people to save more.
  • It should be sustainable. Any proposal for reform should also be in line with the government’s long-term fiscal strategy.

That last one is particularly interesting when twinned with the following statment:

The government wants to make sure that the system of support for pension saving encourages individuals to save a larger amount for a longer period of time.

The gross cost of pensions tax relief is significant. Including relief on both income tax and National Insurance contributions, the government forwent nearly £50 billion in 2013-14.

In other words, the reform sweet spot would prompt people to save more of their own money, enable the State to step back – and kibosh the “Please sir, can I have some more?” routine.

There’s a clear implication that relief may be less generous in the future, especially as only a third of the relief currently goes to basic rate tax payers (although perhaps that wouldn’t be so skewed if the higher rate tax bar had been moved up with inflation).

One suggested change is taxing pension contributions upfront while withdrawals are made tax-free. Pension tax relief would apply on the way out, not the way in, just like ISAs operate today.

This need not leave us any worse off but I can think of a slew of reasons why such a change would be a bad idea.

Promises, promises

The number one reason that a change to ISA-style funding would not get my vote is that trust in government is poor.

Every time the slightest change to pensions is mooted, our comment columns swarm with doomsters predicting political chicanery and Argentine-style confiscation.

So I can imagine the reaction to the mooted change: “Yeah, well, they’ve nixed upfront tax relief now and in ten years time they’ll abolish it at the other end, too. I’m burying my savings in a river bank.”

Such a conspiracy theory would be impossible to disprove.

Give me the bonus upfront, and at least I know I’ve got something out of the deal. Promise me help years from now and well, hey, given the current level of faith in the political elite, it’s hard to think of a better way to torpedo saving short of exchanging lottery tickets for contributions.

The real problem with the current incentives is that they’re poorly communicated, intangible and obscured by off-putting technical language that’s alien to most people.

That dissipates the power of those incentives to help people overcome the hurdles they face when trying to save.

It’s like handing people an amazing energy bar but marketing it as soap – all very well, but I don’t get how it’s gonna help me right now.

Why is pension saving so hard?

Have your say on the future of pensions

In my experience, the fundamental problems many people face when saving for their pension revolve around means, human nature and knowledge:

  • People are hard-pressed financially. A pension is seen as yet another expense but one that can be dealt with in the future. Much more imminent is putting food on the table, buying clothes, going to the pub, dealing with debts, the mortgage, and paying for a car or a wedding.
  • The future is another country. It’s easy to worry about it later. Especially as you might walk under a bus tomorrow or win the lottery or be able to cope better after a few pay rises. Anyway, there’s the State Pension right?
  • Direct contribution pensions are a complex area that few people have been given the educational tools to handle. How much do you need to save? What should you save into? What are equities and bonds, anyway? What’s a platform? The knowledge required is daunting and people can’t face it.
  • People don’t see the importance of early action and how compound interest can lift the weight from their shoulders. They don’t know how much more powerful a pound is if saved now in comparison to later.
  • Risk is completely mis-sold. People believe they could invest for 30 years and end up with nothing. Technically true but highly unlikely. Sadly, the human mind has a habit of blowing small risks out of all proportion.

In my view, the reasons people don’t save enough for their old age have far more in common with these sorts of realities than with the tax relief system.

Many people don’t understand how important saving is, how much they need to save, in what product, and for how long.

And, sadly, many don’t understand what help is available or how much difference it makes.

Communication, communication, communication

The antidote is trustworthy, straightforward guidance that suits the majority who struggle to engage.

Firstly, the incentive has to be upfront. Given the problem we all have with imagining the future, you’d have to be insane to think that offering tax relief years hence is more motivating than dangling loot now.

But you do need to make the offer obvious.

What do retailers do? They give us money off. Three for the price of two. Cashback. And in big bright happy shopper flashes.

This is the language that employer contributions and tax relief should be couched in.

A basic rate tax payer who saves £1,000 into their pension?

That’s £250 cash back!

If an employer matches with another £1,000 then you’re in for a £1,250 cash boost.

You’ve more than doubled your money!

This information should be on your payslip and in an annual statement from HMRC. Make it simple and make people feel smart for being on board.

The message should be this clear:

You saved: £1,000
Your employer added: £1,000
The government added: £250

Cash boost = £1,250

Total saved = £2,250

Who would turn down that kind of money?

Email the statement if it costs too much to post. If you didn’t take your maximum employer match, then the statement should show how much money you’ve given up in match and relief.

Hammer it home.

It’s true that if I – a personal finance blogger and investing nerd – really work hard at it, I can already see my employer match and work out my tax relief using my payslip. But the information is obscure and in small type and buried in lots of other numbers that are similarly mysterious.

This stuff should clangingly obvious. Otherwise it doesn’t sink in.

And don’t use terms like net income or gross income. Don’t use percentages or codes. Maybe that’s technically correct, but it impedes understanding. People don’t have time to learn to speak alien.

Hold a national design competition to create a brilliantly simple template for payslips and the annual statement. Ask employers to sign up to it in the interests of their workforce.

Saving more

With the incentives properly promoted, how do we get people to put the right amount in?

According to the consultation paper, the average employee contributes 9% of their annual income to defined contribution pension schemes.

But the Pensions Policy Institute says a low earner needs a total contribution rate of 11% to have a 75% chance of replacing their income. Median earners need to save 13%. High earners 14%.

I’ve read a lot about how we need to save 15% of income from wealth management advisors. Frankly, it would be another ball game entirely if a widely respected independent body put out that kind of guidance.

Again, the guidance should be boldly proclaimed on every pay slip and annual statement.

I imagine it might read something like:

The average person should save 15% of income to have a reasonable chance of retiring on 75% of their current income (including the State Pension), according to research by the ONS.

You are currently saving 5% of income. Please talk to your pension provider if you would like to change the amount you save.

Note, I’ve just made the above numbers up and have sadly been forced to break my own rule on percentages in the name of keeping the admin manageable.

There would need to be a debate on what a reasonable chance means and what figures would be used for the percentage of income people typically need in retirement. But the advice industry already revolves around rules of thumb like this so it shouldn’t be impossible to come to an agreement.

To address the issue of saving now – and saving early – I’d put in a compound interest line.

Something along the lines of:

Every £1 saved now is the equivalent of £1.50 saved in five years time.

Again, I’ve made the numbers up, but you get the gist.

Finally, when it comes to the mind-meltingly complex fund scene, Dutch-style collective pensions look like a good bet for reducing the confusion. The evidence suggests that on balance this system offers lower costs, better outcomes and higher rates of participation.

It wouldn’t surprise me at all if the higher participation rates are partly due to there being a consensus that signing up to these funds is a ‘good thing’.

That kind of reassurance is impossible to find amid the UK’s fragmented landscape.

Nudge, nudge

Many of my suggestions are a one-size-fits-no-one kind of a deal, but frankly, where defined contribution pensions are concerned, it’s a crapshoot anyway.

The best you can do is be roughly right and for all the talk of ‘bespoke solutions tailored to your personal circumstance’ it’s rules of thumb that, well, rule.

Most people need very basic guidance that points them in the right direction – and providing it doesn’t stop anyone from delving deeper into the topic and coming up with a solution that they think is better suited to them.

The current ‘you’re on your own’ model is every bit as conscious a design decision as my proposals.

The difference is that the existing nudge-free approach is demonstrably leaving huge numbers of people high and dry.

Take it steady,

The Accumulator

P.S. Here’s a summary list of questions that the report asks. Please have your say in the comments below and we’ll send the lot to the government’s pension and savings team as requested.

Pension reform consultation questions

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{ 100 comments… add one }
  • 1 Nyul July 14, 2015, 9:16 am

    The current system is too complex for most people. A flat tax rebate rate would help I think. Part of the problem is that changing everything will confuse people even more.

    I recently convinced someone in the public sector to join their scheme and the primary argument that hit the spot was along the lines you said: “By doing this you get FREE money”

    I don’t trust governments at all, so on that basis alone am entirely against the government removing front-loaded tax rebates. I’d rather they flattened and lowered the rate. If gov got into trouble in years to come, we all know what would happen.

    My main concern with all of this is the lost returns on initial gross contributions. If I can put money into a pension from my gross, untaxed income then I get decades of returns on that extra money, and not all of it is taken away in retirement taxes. If the tax is applied at the start my seed pot will be smaller.

    My vote goes for simplifying the current system a bit so pensions are user-friendly like ISAs, rather than kicking the whole table over and starting again which as far as I can see only benefits government by saving it some money.

  • 2 Neverland July 14, 2015, 9:33 am

    No more tax free lump sums

    Pension contributions paid out of taxed income by an individual

    End all employer contributions including public sector pensions

    Personal contributions limited to c. £5,000 a year

    £1 for £2 matching by government each year up to c. £2,500 a year government contribution

    Ability to use unused prior contribution years up to retirement

    Drawable on state pension age minus five years

    Limit to 3% of fund value drawable a year

    No lifetime allowance

    Liable to inheritance tax

  • 3 Fremantle July 14, 2015, 9:58 am

    @Neverland, I think the remit is to increase participation, not decrease it!

    On the task at hand…

    People are loss averse. Payslips should show the potential tax relief and employer contributions they’d receive from pension contributions, then take it away from them as foregone tax relief and employer contribution.

    Include as part of the payslip an pension opt in form to start paying into the company pension scheme.

    Giving it to them and taking it away, even on paper, shows them exactly what they are missing out on.

    Teach children how to budget in school. Make pension contributions part of this. Children are great persuaders, just think of all the environmental propaganda that they bring home from school. Nothing like being guilted out by a 7 year old to make you recycle that gross tin of baked beans you used to throw in the rubbish. Use the same logic with pensions. Get children asking naive questions like who is going to pay to look after their parents when they are old. Make their parents feel guilty about relying on the taxes of their children to pay for the state pension.

  • 4 Neverland July 14, 2015, 10:19 am

    @Fremantle

    Better to allow everyone to built up a reasonable sum on retirement and spend the money saved elsewhere

    – infrastructure and housing
    – increasing employee productivity
    – reducing personal taxes

    The state coddles the already rich too much

  • 5 BeatTheSeasons July 14, 2015, 10:38 am

    If pensions are going to be taxed-exempt-exempt then they’re essentially the same as ISAs, so the two might as well be merged into one savings pot. You could be given the ‘cashback’ bonus on the way in (up to a certain limit), but lose it on anything you take out before a certain age. Ideally you would be allowed phased withdrawals throughout your life instead of being able to access nothing up to age 56 whatever life throws at you, and then suddenly 100% at age 57.

    The merger of SIPPs and and ISAs would have the following impacts:
    – Easier for everyone to understand
    – No year end tax calculations to work out SIPP contribution
    – An end to the SIPP vs ISA quandry
    – A flat rate rebate would be fairer than the current situation where your effective tax rate (paid as NI) is 12% for basic rate taxpayers but only 2% for higher rate taxpayers
    – New overall tax-free limits on savings, i.e preventing long-term ISA savers gaming the system by turning ISAs into de facto tax-free pension pots approaching £1m in addition to their other pensions
    – Limits to be designed smartly so contributions aren’t prevented, there is still no tax on capital gains or dividends within the vehicle, but tax is charged or any withdrawals over a certain level (or inheritance tax on death)

  • 6 Fremantle July 14, 2015, 10:48 am

    @Neverland

    The only reason the current tax relief on pension coddles the rich is because of the progressive tax system. Broaden the tax system and tax receipts and tax relief are proportionately equal for all.

    One of the benefits of higher middle class pension savings is for diversity and competition between pension providers. Cut this market down, and the providers are less likely to service the market as efficiently. Ultimately this will impact the products available for lower income earners by increasing costs and reducing the diversity of products available.

  • 7 John B July 14, 2015, 10:53 am

    I agree about benefits on the way in, not out, so ideally I’d like the tax free lump sum removed and the saving passed on as greater input boost.

    Change must not be retrospective, so the value of existing contributions must not be reduced, else no-one will trust the Government not to do it with new contributions, and participation will fall.

    Any change that changes that creates 2 different classes of contributions with different tax implications will be hugely confusing as they will need to run in parallel for up to a century. (probably a reason not to get rid of the lump sum though)

    Pension funds should be subject to inheritance tax.

    A lifetime limit with harsh penalties based on value on access is very hard to predict, and prevents different risk strategies. The Lifetime limit should be only on contributions. I’d not have a problem just using the current rolling 3 year window for contributions TBH.

    Equal boost for all, irrespective of income or contribution level.

    Clarification that they will NOT be making the access age nearer the state pension age. My nightmare is planning for a 60 retirement, and struggling to make ends meet as they’ve upped the age to 65, while my funds have gone over the lifetime limit and are being taxed to death.

  • 8 Learner July 14, 2015, 10:57 am

    As an expat, more needs to be done to allow pensions to be transferred between countries. It’s a complete minefield currently, particularly for US but for many other citizens as well. eg:

    – US citizens face having their investments treated as foreign trusts, requiring tax filing fees that exceed the entire value of the asset, annually. There are no public US QROPS to transfer into.

    – HMRC this year “de-certified” nearly every QROPS in New Zealand.

    UK pensions are increasingly marooned in the UK with no possibility of relocation, while the value is gradually erased by punitive foreign tax treatment.

    If personal pensions cannot be moved, there is a huge risk in even starting one in the UK.

  • 9 Richard July 14, 2015, 11:13 am

    – End LTA; keep a reasonable annual allowance (say £50k).
    – Keep up-front tax relief (pension ISAs would kill pension saving dead, unless other incentives added…but if these are “jam tomorrow” I’d not trust them).
    – Keep the 25% tax-free lump sum (else less reason for basic rate tax-payers to save).
    – Make auto-enrolment compulsory (no opting out).
    – Raise the auto-enrolment total contribution to 15% – 20% over time (say 10 years).
    – If the auto-enrolment proposals were accepted I’d scrap the 25% tax-free lump sum. Indeed, I’d end the lump sum altogether.

    I’m a huge fan of auto-enrolment / workplace pensions. It gives every worker the chance of a career average pension. Funded at the time, and not by future generations.

    If someone starting a 40 or 50 year career knew that 15% of their salary (8% employee, 5% employer, 2% HMRC) would aggregate over time, it would be a huge boost. Over the next 40 – 50 years I’d phase out the state pension, as 15% compounded over 40 – 50 years with stockmarket gains should give more than adequate pension income on retirement.

    There would need to be other safeguards for those who could not (rather than would not) be in employment. Lifestyle choices would not be funded by the state, but genuine incapacity would be.

    Then in 50 years’ time we have a fully-funded, generous, pension for all workers, under-pinned by state support for those who, through no fault of their own, could not make those contributions. Those who deliberately take themselves out of the world of work would receive no sympathy, and little financial support.

    As my plan would be that workplace pensions would be compulsory, there’s less requirement to try to persuade people to contribute. The communication required would be regarding how much their final pension would be worth. So “You are 35. If you keep working for the next 30 years on your current salary of £20,000 your annual pension (which you can draw from 65) is likely to be £15,000 in today’s money.” Clearly there’d need to be small print on investment growth assumptions, etc.

    I’m also not too anti-annuities for most people. I’d like some system where very wealthy or “sophisticated” people had the sort of pension freedoms we have now, but those who are much less engaged with pensions or finance have to take an annuity.

    I would have much prefered the recent largesse over the living wage to have gone into enhanced Govt contributions to workplace pensions.

    Just my tuppence.

  • 10 Neverland July 14, 2015, 11:24 am

    @Freemantle

    We don’t have a progressive tax system

    We have a crazy tax system with crushing marginal rates at the bottom, in the middle and towards the top

    Meanwhile huge chunks of unearned income and capital are completely tax free because no one has the guts to attack vested interests unless they are in a union

  • 11 Fremantle July 14, 2015, 11:43 am

    @Neverland

    I agree that marginal tax rates are a killer, particularly at the bottom, but these partly exist because of progressive income tax. I’m not sure I follow your claim that we don’t have a progressive tax system. Do you mean the net effect of the overall tax code? Our income tax rates are definitely classed as progressive under accepted definitions.

    What do you mean by unearned income? Do you mean property income alone? Or do you include income from all forms of capital? Even welfare is considered unearned by common definition.

    The cynic in me suggests that it is the unions themselves that are the vested interest now days given the low union participation rates in the private sector compared to the public.

  • 12 Neverland July 14, 2015, 11:53 am

    @Freemantle

    Examples of lack of “progression” in the tax system just off the top of my head:

    – inheritance tax threshold and exemptions
    – tax credit system
    – withdrawal of child benefit
    – withdrawal of personal allowance
    – lower taxation of capital gains
    – existence of non-dom system
    – low property taxes
    – tax deduction for interest payments in corporations

    You want to see a closed shop in action go look at the big 4 auditors not the RMT

  • 13 Fremantle July 14, 2015, 12:25 pm

    @Neverland

    We’re using different definitions of progressive, from google… “A progressive tax is a tax in which the tax rate increases as the taxable amount increases”. IHT is progressive, if you have less than the threshold you pay none, above you pay 40%.

    I think we leave it here as we might be off-piste somewhat for the topic.

  • 14 Rob July 14, 2015, 12:31 pm

    The end of a fixed retirement age makes pensions an anachronism.
    People stop working full time at all sorts of ages so the question simply becomes:

    “When will I have enough money to live on for the rest of my life?”

    Why should people get a tax incentive to stop working?

    My view is that all tax incentives for pensions should be abolished.

    Make it a level planning field and let individuals decide how to split their spending between instant gratification now and delayed gratification at some point in the future. Which they may not reach. My first wife died at 48.

    One minor point. Governments do not lose tax revenue from pension allowances, it is just deferred spending.

    My only concession would be to ask for the removal of stamp duty on share purchases to encourage long-term investments.

  • 15 Mathmo July 14, 2015, 12:33 pm

    Pensions — on the face of it — are a bloody awful proposition. Tuck money away in a place where you can’t get it for years and years? Why would you?

    So you really really need to make it obviously worthwhile. The tax rebate on contribution is probably the biggest incentive — and look it happens just at the point where you make the decision to save. Instant gratification. Could that be restricted to BRT and still be a good incentive? Hmm. Probably. It’s marginal — pensions are an arbitrage on future tax rates (I believe I will pay a lower tax rate in the future so I’ll defer my income). If you are getting 20% relief on the way in to pay 20% on the way out — why bother?

    Could it be restricted to £50k a year and still be really good incentive? Definitely. ISAs have a cap.

    Removing the tax rebate makes it an ISA. And at least ISAs have flexibility to mean that you can take the money out if you see the government coming to steal your pension pot. You can also spend them on holidays and the deposit for a house and oops no retirement funds left.

    So you need a age-tied pot and you need an incentive to lock-in to that pot. The only lever to Government has to pull is a tax refund on contributions.

    * * *

    Incidentally the LTA is a nightmare — how do I know what my pension pot will be worth after decades? Perhaps I should stop saving now rather than face the risk of going over the LTA (or a future LTA). Restricting relief on the way in is good enough to remove the LTA.

    * * *

    The obvious answer here is to increase the cost to employers. Put the minimum wage up. Make pension contributions compulsory. Remove NI relief on pension contributions. Basically make it impossible for anyone to employ anyone ever again, in anything but the highest margin businesses. Move all un- and semi-skilled employment overseas and make Britain uncompetitive in all but lawyering and banking.

  • 16 vanguardfan July 14, 2015, 12:33 pm

    @TA I think your proposals all sound good. I also like @Richard’s wish list. I’d even support at least 50% of @Neverland’s proposals (but not the first three in the list).
    Of course it depends on what we’re really trying to achieve – is it a ‘fair’ system (I suspect there would be various ways of defining that!), is it a system that saves the taxpayer, or is it a system that provides the best outcomes in terms of numbers of pensioners living a decent life?

    I think any reform should seek to target tax reliefs to those who most need the incentive to save to supplement state pension – I like the idea of a flat rate relief for all as first proposed by Steve Webb I believe.
    The LTA as currently constructed seems bizarre and complex. I think limits should be based on contributions, like ISAs, either annually or, possibly over a lifetime.
    I also think there should be more incentives to help prevent people running down their pensions too soon. Tax free withdrawals would mitigate against this – at least with the current pension freedoms, the tax hit should encourage steadier withdrawals to some extent. Human nature is very ‘present’ orientated, its a known fact that people underestimate their longevity and fatalism/YOLO are potent emotions when a pension is no longer a future income stream but just the largest pile of money you’ve ever previously been able to get your hands on…

  • 17 weenie July 14, 2015, 12:34 pm

    Compulsory auto-enrolment, unless that person can prove that they are paying into an alternative pension plan.

    Financial education for both children and adults.

  • 18 Neverland July 14, 2015, 12:35 pm

    @Rob

    I am sympathetic to your point of view but the human mind and body wears out some time and its pretty sensible for people to be encouraged to save for that day. Otherwise other tax payers have to pick up the bill

  • 19 R July 14, 2015, 12:37 pm

    TA — Pension reform is a sensitive area that requires clear and stable rules over the long term. Since the current government cannot commit future governments, taking the time to develop a “national consensus” involving the major political parties would be important in my view. But this is out of the scope of the consultation.

  • 20 John Kingham July 14, 2015, 12:39 pm

    1. Change pensions so that that they are taxed on the way in and not on the way out like an ISA.

    2. Give everyone, regardless of tax rate, 20% “cash back”, or whatever rate gives the best tradeoff between cost and participation amongst those who most need to participate.

    3. Limit contributions to current year earnings.

    4. Make annuity purchase mandatory again (if you want to get your capital back use an ISA). This is the “price” of getting that 20% cash-back.

    5. Open up the annuity market as much as possible so that it is truly competitive (so property, crowdfunding, P2P lending and other things could provide “annuities”, as long as the income is guaranteed until death).

    – John

  • 21 vanguardfan July 14, 2015, 12:45 pm

    @TA this could soon win the prize for longest thread…
    I agree with R that this topic really merits a serious investigation, trying to achieve a broad and long lasting consensus, and taking more evidence from international examples. International portability is also important, but which government has an interest in promoting that?

    We need to try to reduce the political interference. I can’t believe that only months into the experiment in ‘pension freedoms’ they are flying kites about ideas which would essentially abolish pensions completely. We don’t need ‘pension ISAs’ – we’ve already got them.

  • 22 PC July 14, 2015, 12:58 pm

    Removing the Life Time Allowance is what would incentivise me the most to keep contributing to my pension.

  • 23 Jeff Beranek July 14, 2015, 1:11 pm

    Great ideas Accumulator and others. I would strongly support some sort of flat-rate or progressive “cash back” on contributions with a much lower annual allowance (combined with removal of the lifetime allowance). However don’t change pensions so much that they are no longer recognized as pensions by international tax treaties. While you’re at it, please please help make pensions portable internationally. Alternatively, create a direct equivalent of the American Roth IRA (https://en.wikipedia.org/wiki/Roth_IRA) which promotes gradual lifetime (taxed) contributions but freedom from tax in retirement.

  • 24 paullypips July 14, 2015, 1:14 pm

    Well I’m not sure that I’d like to see any major changes to the current system as I distrust the government. I feel that the treasury will see the “new” ideas as an opportunity to reduce their financial contribution going forward. The current system is complex but that is because it is flexible. I love the new freedoms brought about by George Osborne as I had already decided that an annuity was not for me.

    I agree with The Accumulator that education is the key to improved participation in pension membership. I have spent many hours discussing pensions with others and like to think that I have convinced a few handfuls of individuals to join a pension saving scheme.

    Most folk don’t realise that they are being offered a pretty good deal i.e. FREE MONEY as explained above. Once they appreciate the “free money” bit, they then have trouble with the “what investment” decision. Yet we know that for the majority a simple tracker would suffice and would be far superior to not bothering with a pension.

    In my opinion education and plain speaking are the most important things to be addressed. For example, I pointed out to a colleague that I was getting £300pcm more than him from our employer as he “didn’t really believe in pensions”. On top of that I was getting tax relief on my contribution too. He became much more receptive to joining the firm’s scheme than before. This may have been partly through jealousy but it worked.

    In general it all adds up to the general disinterest in investing/saving of any kind to be found in the UK public. Where are the informative and interesting programmes on TV, I cannot think of one? Lord knows we don’t need another cookery programme but that is more like than one on the “dirty” topic of money.

    Thank heavens for this blog, I would like to thank everyone involved in its production for their efforts. It has helped me personally in so many ways so many thanks again to both copy writers and commentators alike.

  • 25 Steve July 14, 2015, 1:14 pm

    I do agree trust is the key here. It needs a big carrot or a big stick to encourage people to play a high stakes, decades-long game with a 500lb gorilla who gets to change the rules any time he feels like it. I know I wouldn’t be making pension contributions if it wasn’t the only way to escape IMO unreasonably high marginal tax rates – I’d be saving for my future anyway, but not via a pension.

    I have no idea how that trust can be built, however.

  • 26 BeatTheSeasons July 14, 2015, 1:14 pm

    Since I started contributing to my pension the earliest withdrawal age has increased from 50 to 57 in a very short space of time. Surely the biggest disincentive for investing in pensions is that you can’t get your money back out again until you’re “old”? And, related to that, that people can’t imagine themselves being older than they are now. If you could always withdraw some of your pot, albeit with a tax penalty, I think people would be more willing to stash the money away, especially if they see ‘cashback’ added. Calling the vehicle something everyone can understand like your ‘nest egg’ instead of your ‘pension’ or some confusing acronym would also help. Or how about letting people name their own account as some forward thinking banks do?

  • 27 Mathmo July 14, 2015, 1:40 pm

    It does strike me that most pension contributions are money that people don’t really feels is their to hold in their hands. Employer contributions and tax rebates all feel a bit remote compared to opening your wallet and deciding to spend £50 on your future self instead of more lollies.

    Why is that?

    It’s trust. People don’t mind punting money that doesn’t really exist on some decade-long scheme they don’t really trust. Maybe it shows up when I retire, maybe it doesn’t. Who cares? It wasn’t my money anyway. It’s a bit of a bonus. But of course it’s very real money to the employer or the government.

    And who can blame them? The government has previously raided pension funds with the change to dividend taxation, and the City has grown fat and happy by overcharging for undergood management of the wealth.

    It’s not the complexity that is the issue, then, it’s that lack of trust that needs to change. The government needs to take a lead by tying its hands as much as it ties the contributions, and any promises it makes for free money need to be paid up front. Educate children how compound interest really works. Fill the newspapers and TV channels with Moustachians and heros of the FIRE movement and show people what saving really looks like.

  • 28 Gordon July 14, 2015, 1:45 pm

    Compulsory Personal Finance lessons for all school children as part of the National Curriculum

  • 29 vanguardfan July 14, 2015, 1:55 pm

    Personally I think ‘education’ about personal finance can only take you so far – some element of compulsion/sticks and carrots is also necessary – supported by the kind of very clear information messages at the point of action as described by TA.
    In particular, I suspect that trying to teach children about pensions may be fairly ineffective. I’m all for including practical maths and money management in the curriculum, but I think we need to be realistic about what it can achieve, and it also needs to be age-relevant – helping people overcome fear of numbers and develop good basic numeracy is probably a key goal. Teenagers also need to understand debt and tools for managing money – lets send people off to work or further study with the skills to live within their means, and hopefully they will be a bit better placed to work out mortgages and pensions and student loans at the right time.

  • 30 pejj July 14, 2015, 1:58 pm

    This is a smoke-screen consultation so that they can say they had one. No matter how or when or to what degree pension contributions are tax free, the dumb-ass chancellor lets silly people take it all out when they retire and blow it on ‘stuff’. Then 10 years later they join the queue at the food bank and complain that ‘the govment’ ought to care for the elderly. Whatever pension fund you accumulate should be kept as a pension fund until you are dead. I think all pension contributions should be subject to a lifetime record which demonstrates that you had a pension at retirement age, so that anyone who has made tax advantaged savings and then blown the lot can justifiably be told that they can not come back and sponge.

    I like the American idea where you save tax on the way in and pay it on the way out. You are allowed – nay, required, to take out a specified amount dependant on your life expectancy so that you can’t just hoard it to fund the estate tax fund, neither can you blow it all in one go because it throws you into a higher tax bracket. Most importantly, it encourages you to make sure that it lasts as long as you need it, but not much longer. Special cases could be made for life thratening diseases or special circumstances.

  • 31 Passive Investor July 14, 2015, 2:12 pm

    Quite a lot of my wish list is covered already. The principles I would like to see are

    – keep tax relief on the way in. As others have said who would trust future governments not to change the rules?

    – insist on low charges for participating providers

    – only offer tax relief on index funds

    – give a level playing field between public sector pensions and defined contribution schemes. One of the greatest iniquities with the current LTA is that the limit is effectively much higher for final salary public sector schemes than for private defined contrib schemes

    – possibly end final salary public sector schemes. They allow senior doctors and civil servants and others to bump up their salaries for a few years before retiring. The pension benefits that have been reaped this way (with minimal contributions) are sometimes eye-watering

  • 32 Jaygti July 14, 2015, 2:14 pm

    Compulsion is the only real answer.

    Ask a 25 year old if he would rather £30k in a pension that he can’t touch for 40 years , or £30k towards a house deposit, getting married, or BMW m3, etc, it’s pretty obvious what the vast majority would choose.

    If you take that choice away , the problem will be partially solved straight away.

  • 33 vanguardfan July 14, 2015, 2:21 pm

    @passiveinvestor – you are out of date regarding public sector schemes – since April this year they are no longer based on final salary but on career average earnings, which will be more progressive than the old final salary model.
    The settlement for the new public sector schemes was supposed to be good for 25 years. We’ll see. I do understand (and would not defend) the inequity in the LTA – but I think the LTA is counterproductive anyway and needs abolishing/reforming.
    Some of the new public sector schemes limit the amount of annual pension that can be accrued within the DB scheme – I think that would be a reasonable position, which would stop the abuses by the very highly paid that you describe.

  • 34 bobbyo July 14, 2015, 2:21 pm

    +1 for compulsory auto-enrollment with possibly a stepped increase from say 25-35, 35-45 etc. Also if we standardised the tax relief across basic and higher rate tax earners at say 30 or 35% the biggest incentives are there for the people who need most help, so it’s fairer…

  • 35 Thesquirreller July 14, 2015, 2:37 pm

    I will wager that this post will see one of the largest number of contributions with a huge array of differing opinions. This immediately flags what a can of worms this is for any government to try and rectify. Here’s my 2 pence worth

    1) Personal finance education in schools – we have to make people realise how money can work for them, show the benefits of saving early and for a long time but also make people realise that pensions aren’t either a place where you lose all your money or a magic box where £50 a month for 20 years on the way in will not equate to £1000+ a month on the way out for 20+years.

    2) Totally agree with the “addittional money earned” flagged on every pay slip along with “potential free money lost” for those not utilising fully.

    3) Flat rate of tax relief designed to benefit those on lower/middle incomes greater. Ie everyone gets 30% tax relief on what they save (assuming the numbers stack up for govt)

    4) with a flat rate of tax relief you can abolish the lifetime allowance caps which also add another level of complexity unnecessarily as currently they are in place to prevent (higher tax rate) individuals benefiting past a certain level.

  • 36 Fremantle July 14, 2015, 2:45 pm

    -1 for compulsory contributions

    Whilst everyone would benefit from long term saving, compulsory pension contributions fail on a number of fronts.

    For the poorly paid, compulsory pension contributions would have a disproportionately negative impact on their current living conditions and are unlikely to have a substantial impact on their future living conditions.

    For those with different short-to-medium term objectives such as saving for a property, compulsory pension contributions limit their ability to choose which goals to pursue.

    Compulsory contributions are likely to be funnelled into poor value for the employee/good value for the employer products. These products can have high fees and be subject to poor governance, such as in Australia.

    Nudge people, don’t chain them.

  • 37 Andy July 14, 2015, 2:48 pm

    1. It has to be tax free to pay in otherwise you kill pensions. I would cease contributions immediately if they were taxed on the way in.

    2. Lose the LTA. I’m nowhere near being affected by that now but am mid 30s and give interference/money grabbing suggests this limit will not move anywhere for a long time. Plus the govt could further ‘quantitative ease’ pushing up the values of sotcks further, dragging more people into the taxable bracket.

    3. Introduce an annual limit to pay in, at least 100k as no doubt this would be inflationed down.

    4. Make a pension fund liable to IHT

    5. No idea how this could work but prevent further govt interference. Based on past experience it’s not possible to trust the govt not to try and skin more pounds of flesh out of pensions. The comments on this forum strongly suggest people don’t trust the govt.

  • 38 John B July 14, 2015, 3:03 pm

    We have compulsory contributions already, as NI to fund the safety net state pension. While you want to encourage saving, a pension is not always the goal. 25 years ago as a new graduate my employer had a scheme where they would divert their pension contributions into a house deposit fund, and I was very grateful, as the financial pressures were much greater then. Now I have more spare income I can catch up on my pension. This would be an argument for lifetime allowances, except I can’t see a way of comparing a 1990 in a 20yo’s pocked pound to a 2015 one in a 45yo’s.

  • 39 Richard July 14, 2015, 3:49 pm

    There are only three sources of pension funding:
    – “The State”
    – Employers
    – Employees

    State spending needs to be seriously curtailed – I’d tackle the welfare culture before pensions, but that’s for another day…

    And the state is funded mainly from employers and employees so does
    not exist as an independent source of money.

    Employers should not be heavily tapped, but should contribute somewhat – as part of acceptable 21st Century first world “working conditions”.

    The real burden should fall on employees. Essentially save more today to fund your retirement tomorrow. It’s fiscally prudent and morally right.

    I can see most people doing this only through heavy incentivisation or compulsion. Incentivisation (e.g. tax breaks) costs “the state” money, so the main burden should be on compulsion. Not ideal, but I see no other way.

    Given that the “living wage” will be – IIRC – £9/hr in 2020, that’s about £18,000 a year for a full time worker, and with the high personal allowance nearly 2/3 of that is outside income tax. Surely some of that extra should be diverted towards a pension…is it really too much to ask that every worker puts aside 10% of their gross salary (with another 5% from the employer)?

    If it’s taken at source, it won’t be missed so much. I don’t like compulsion but I simply don’t see a large voluntary take-up at the 10% gross contribution level. We all have other things we could be spending our money on…

    Agree with the need to reform public sector pensions. It used to be they were poorly paid, but got good pensions. This was fair enough and is actually a good thing as they were living on less today, to fund a better tomorrow.

    However public sector wages seem to be on par with private sector ones (or better in some cases) and still have v good pensions. Not sustainable.

  • 40 Richardperson July 14, 2015, 4:26 pm

    The real question the treasury is asking is: how can the government get away with spending less pensions and pension tax relief?

    Which is a fair enough question.

    I’d say:

    – Scrap the tax relief on the way in.
    – Replace it with a 50p bonus for every £1 for by HMRC for every £1 invested by an individual; up to an annual limit of say £12,000 (£8,000 invested, £4,000 top up)
    – Keep a higher limit on total annual allowance, say £50,000.
    – No tax on the way out.

    This has the advantage of:
    – Being relatively simple to understand (ie it’s a bit like an ISA).
    -The 50p for every £1 invested sounds like a great deal, and it’s much simpler to understand than ‘you can reclaim tax on money invested’.
    – The annual limit would save the treasury money overall. (In other words, basic rate taxpayers would benefit greatly, higher taxpayers much less so. Additional taxpayers would be worse off than the current system… but do those people need the incentive as much?)

    TI makes the good point about not trusting future governments not to tax people on the way out. But people of pensionable age are the last people governments want to annoy, as they’re the section of society most likely to vote.

    But I think what people really want is a simple, trustworthy fund that they can understand and pay into. The current choices for auto-enrolment approved pensions seem poor to me. I was happy to spend a month learning about stocks and bonds and tracker funds etc. Most people would not be.

  • 41 Richard July 14, 2015, 5:12 pm

    If it was me in charge the choices for the auto-enrolment funds would be essentially zero charge and a small selection of tracker funds, such as the Vanguard Lifestrategy series.

    Indeed, as is often said on here, choice for the investor (=meddling) can often lead to poorer outcomes compared to the “do nothing” approach.

    So if I was very prespcriptive I’d put all workplace pensions in to LS100 if you’re in your 20s. Switch to LS80 in your 30s. LS60 in your 40s, etc.

    Of course these LS funds would have to be run by the Govt, not actually by Vanguard.

    I’ve rather got into this compulsion thing. I think I’d make quite a good dictator…

  • 42 mick July 14, 2015, 5:38 pm

    +1 for compulsion to encourage money to be paid in

    Get rid of the state pension – it’s a disincentive to save for yourself, if you ‘know’ the government will provide you a ‘decent’ standard of living in the future. If you have to claim welfare in your old age because you didn’t save enough, that might focus attention.. ( sure, this might just be renaming State pension to Welfare payment but it would take away the false certainty that the State will always provide enough for your old age)

    I’d like pension statements that combine pensions from different companies, and that don’t try to predict the future. They all have different retirement ages, assumed growth rates, asumed inflation rates. Just tell me I’ve got £x pounds in my pot now andI can figure out how many years it will take me to spend it.

  • 43 PC July 14, 2015, 5:43 pm

    @Richard

    I agree, a default of some very simple and very cheap LifeStrategy funds or a public equivalent would be a good start.

    Plus an upfront tax relief bribe, otherwise why would anyone lock their money away for years.

  • 44 Topman July 14, 2015, 5:47 pm

    @various

    The better education aspect would be essentially doomed from the start. The harsh but unavoidable truth is that the people most in need of such education, would by and large be those least intellectually able to comprehend the message and act upon it effectively.

    Before the PC brigade sets upon me, believe me that I am wholly sympathetic to the need to protect and aid the “weak” in society but it is as true now as it ever was that you can’t make a silk purse out of a sow’s ear. Although never a teacher, other than some part-time finance lecturing to help pay the bills many moons ago, I have extensive hands-on education experience as a governor at two different schools, and only the most “crazed” idealist would claim that all people are equally educable if given the right tuition.

  • 45 Steve July 14, 2015, 5:55 pm

    It isn’t remotely likely and I have no idea if it’s workable in practice, but in some ways my preferred solution to this would be a livable Citizen’s Allowance (combined with, say, a flat 30% tax on all other income). No one dies in the street through improvidence or ill-fortune and we’re all free of the rules and regulations on ISAs/SIPPs/dividends. You prefer to save for a house deposit before saving for retirement? Your choice. You fancy your chances investing in Bolivian penny stocks? Knock yourself out. Something of a libertarian fantasy in reality, I suspect, but couldn’t resist chucking the thought in.

  • 46 Finance Zombie July 14, 2015, 6:12 pm

    It’s all about trust. Do the government trust the public with more choice and access to their savings. Do the public trust the government not to change regulations that would not be in the publics favour on funds that are tied up for years.

    If there was no tax relief would anyone pay into a pension? Not a chance. We weigh up the benefit of the tax relief against the risk of not being allowed access to our savings or changing regulations. So the relief, as it currently is, has to be up front.

    You can see why it’s done though, incentivise people for long term savings but then make withdrawing from this very prohibitive. Should reduce stress on the state. But it just gets awfully complicated.

    My pennies;

    – Slowly reduce the current state pension, or get rid of it. People look to rely on it completely, with no real feel for how much they pay in vs how much they then draw.

    – Compulsory contributions to a gov’t pension scheme, DC style, with some very simple choices available. Index trackers. So it is cheap. I don’t know if this would be a fixed portion of income, a portion of income up to an absolute cap (i.e. so that this plus the state pension would provide a ‘minimum wage’ in retirement and people may contribute more if they wanted to) or some other limit. But done in such away that it doesn’t feel hugely prohibitive. Access to this would be restricted until some age, the governments deemed retirement age.

    – Outside of this do away with SIPPs/ISAs and just have one vehicle to encourage long term savings. Allow more flexible access to these savings, i.e. not heavily taxed like pensions are before age 57. Tax relief up front or on withdrawal? Up front is more encouraging, but maybe more complicated to administer.

    There are huge gaps….what happens when you are self-employed, what happens to those that don’t/can’t work, what happens if unemployment sky rockets, what happens if markets crash, etc etc….

    I say all this, whilst I would personally like freedom to just get on with it myself. The only reason I’m in the employers pension is for the “Free Cash” in the form of tax relief and their contributions….

  • 47 dearieme July 14, 2015, 6:30 pm

    Keep the TFLS because it has entered public consciousness as a good feature of pensions. Other withdrawals to be taxed as income, and to be available from State Pension Age less 10 years – partly because people are made unhappy by the bewildering changeability of pensions law. It would be best to keep some features unchanged.

    3 for the price of 2: permit maximum annual contribution of £10160 p.a. to be joined by taxpayer subsidy of £5080, so the the gross contribution = annual ISA allowance. (If this is too expensive, reduce both allowances until they are affordable again.) The £10160 can be split between employee and employer I suppose but does it matter? Wages are adjustable.

    An end to using salary sacrifice to avoid NICs.

    Existing defined benefit scheme members to become deferred members and join this new world instead. (I’m none too certain of this suggestion.)

    I don’t know how to stop the risk of people “double dipping” i.e. pissing all their pension money away and then living off doles. I can’t imagine a future in which politicians had the balls to put a stop to that and still find themselves electable. So, as usual, the perverse incentives of the welfare state are a real constraint on policy.

  • 48 John Kingham July 14, 2015, 7:08 pm

    +1 to what Steve said. I like the idea of a basic income for all and with that in place there’s no need for the state to worry about nudging people to save (assuming the basic income theory works in practice).

  • 49 Matt July 14, 2015, 8:33 pm

    Simplify by:
    – scrapping the LTA. It makes little sense given that pension inputs are capped at £40K or less anyway. The LTA is a significant disinsentive given the uncertainty of future growth. It also makes things very complicated for planning.
    – Scrap the carry forward rule. It doesn’t exist for ISAs.
    – Have a flat rate of tax relief, either at basic rate or marginally higher. (I speak as an additional higher rate payer)

    Don’t
    – do anything that reduces the flexibility / value of any current pension funds – that would make people lose faith in locking their money away long-term
    – remove the 25% tax free lump sum going forward.
    – remove the new withdrawal rules
    – do anything that means we’d end up with “old rule” vs “new rule” pots of money which are segregated and which will make things even harder to manage and plan

  • 50 david m July 14, 2015, 9:19 pm

    I think you need:

    1. Financial education about compound growth and about “free money” from employer and government contributions
    2. Auto enrolment but not total compulsion
    3. Employee contributions at a serious level (e.g. 8%)
    4. Employer contributions (e.g. 50% match, i.e. 4%)
    5. Tax relief or government contributions (e.g. 50% match, i.e. 4%)
    6. Limit the tax relief or government contribution, but remove the £1m limit on fund growth

    Currently 61% of my pension is from compound growth over many years, 12% from employer contributions, 11% from contract out contributions and basic rate tax relief, and only 16% from my employee contributions. I would hope to be able to draw 4% per annum from my pension when the time comes.

    I think if more people can see the that their contributions will be topped up and will enjoy compound growth then they will be motivated to contribute.

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