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A consumer&#39s view

The pension crisis needs a totally new approach if people are to be persuaded to save for retirement. The proposals in the Green Paper are all unattractive to the man in the street, even if the investment outlook were more cheery. Compulsion has the enormous drawback, so far as the authorities are concerned, that it leaves the Government holding the baby if things go wrong.

None of the Green Paper proposals has much appeal to the public. Who wants to carry on in a dreary civil service job until 65? One of the few attractions of working for the public sector is the early retirement age and index-linked pension.

If the Government were honest, it would admit, too, that this latter invaluable perk might have to be modified at some stage in the future. Civil servants are no longer poorly paid by comparison with the private sector and the largely non-contributory index-linked pension is over-generous in today&#39s tough climate.

Given the total lack of success of stakeholder pensions, except as a tax avoidance vehicle for the well-off, a new approach is needed. If the Government were to reduce taxation for those on low incomes in a way the average person could understand (rather than incomprehensible tax credits which have to be claimed) it would go some way towards helping the low-paid to afford to make savings.

The current debate about the FSA&#39s backing for filtered questions and whether or not this is the way forward for selling stakeholder pensions and the new suite of similar Sandler products is irrelevant. The way forward is to introduce new incentives for the lower paid to save.

There is a way for the Government to do this which need cost nothing and would even improve the Government&#39s cash flow in the short term.

Successful IFAs know you have to appeal to investors&#39 greed to sell products. A typical example of how little the Government understands the problem is the surprise it expressed that critical-illness cover sells better than mortgage payment protection when it encouraged the ABI to review MPPI cover for homebuyers.

The reasons are obvious. With critical-illness cover, policyholders get a lump sum if they develop one of several feared diseases. The lure of the lump sum offsets the fact that they have to be seriously ill to collect. This product plays heavily on both fear and greed. MPPI, however, offers what appears by comparison to be a miserable monthly income when you are sick or unemployed, so it is much more difficult to sell.

Low-income households do not appreciate the benefits of tax relief on pension savings. The fact that their investment is enhanced by the Government adding monthly tax rebates to the investment has little appeal, even if they understand it.

So why does the Government not offer 40 per cent tax relief to all, but paid as a cash lump sum or added to the policy at five-yearly intervals? The promise of a £2,000 lump sum – cash in hand – or added to a £1,000 a year or £20 a week policy after five years, sounds much more enticing than tax relief.

Admittedly, most people would probably withdraw the cash but at least they would have some pension savings, whereas today half the working population have none.

This option has the advantage that the Government does not have to pay for the tax relief today but in five years time when the economic situation may well have improved.

There is a problem that the tax relief would not be invested but the Government could make the cash offer even more attractive by adding interest at, say, the current rate. The scheme could be constructed to be revenue-neutral and would not need to replace the current system of tax relief as it could be offered as an alternative. Employers could be involved to further enhance the cash lump sum if necessary.

The prospect of cash after five years seems much more attractive than a tax-free lump sum at retirement which for the younger investor is too far away in the distant future. It is worth a try and we need this type of new approach if the pension crisis is to be solved.

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