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Dose of reality

People need to understand that if you do not save, you will be poor

Reform of the basic state pension is a great idea. There are two issues with the state pension. One is that it is complex. The average person has not got a clue how the system works, it is difficult to understand because there are so many different components. It is very difficult for the public to engage with the real value of the state pension and how it is an impor-tant component of their retire-ment if they do not understand it.

The second thing is we curr-ently have the situation that it is grossly unfair for people with modest pension funds. As these are means-tested, it means having a small pension pot that you have built up over years can work against you.

This is a real disincentive to save. You could be worse off than someone who has just not saved. That is just not right.

The other element is that nobody seems to be talking about the cost of the infrastruc-ture required to deliver and administer the state pension in its current form.

It is horrendously complex, it requires a lot of resource and a lot of people to run and because people do not under-stand it, they have queries and that means these queries have to be addressed.

If you can simplify this and make it something that people understand, the infrastructure costs will be less and you will therefore save money by not having that infrastructure in place. That money could be used more constructively elsewhere rather than to employ people to explain a system that nobody understands.

In this country, we seem to have this notion that the state will look after us. And this kind of nanny state thing. People have to be disavowed of this notion. The reality is, if you do not save for retirement, you are going to be poor.

There has to be clarity to say the state will provide a basic level of income in retirement but that is it. For people to say: “Don’t expect to be dining out on this for the rest of your days, it is just a basic, liveable income. If you want a better retirement than that, you are going to have to plan for it.”

Of course, this gets into issues of tax relief and education of the public and access to advice. But there needs to be clarity about the state pension’s limitations and ideally what you want is a system that is simple enough that the infrastructure required to manage it is not as significant as it is now. You can argue about the amounts involved but the notion of a simple, universal state pension is great.

The notion that you simplify it and try not to punish people who have saved in good faith is very welcome direction for the Government.

Carl Melvin is managing director of Pension Transfer Solutions

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