View more on these topics

Operation pensions

Urgent action is needed to get people to save for retirement

The pension system is broken. Over the years there has been plenty of tinkering around the edges and changing of rules and regulations but the long-term problems of the pension industry remain. It is time for radical action.

The Liberal Democrats have argued that higher-rate tax relief should be abolished on pension contributions. All this will do is discourage higher earners from investing in pensions. With the restrictions in higher-rate tax relief already announced, anyone earning more than £130,000 a year will need seriously consider making any further pension contributions from April 2011. Is it really sensible for high earners to invest in an inflexible product where they get initial 20 per cent tax relief but face a 40 or 50 per cent tax when taking benefits?

However, the real challenge we face is in encouraging low earners to save. Put simply, too many people are not saving for their retirement and are on course to becoming a burden on the state. With an ageing population and comparatively less people working, this is a burden we cannot afford.

The Government is trying to address these issues with Nest. Similarly, it tried with stakeholder pensions and pension simplification. To date, all attempts have failed.

People do not invest in pensions because they are faced with rules they are not able to understand, an industry they mistrust and the risk of losing meanstested benefits if they do make any pensions savings. We need to make pensions attractive.

Initial tax relief of 20 per cent does not engage people. What if tax relief was increased to 100 per cent, so every pound invested is worth £2? Clearly, we cannot afford to do this without limit and so we need to see what is affordable.

We could cap contributions that benefit from 100 per cent tax relief to, say, £1,000- £5,000 a year. Even if the cap is just £1,200, it means people could invest £100 a month and get real tax incentives for doing so.

Beyond this limit, people should still get tax relief at their marginal rate. This will also make it attractive for higher earners to invest. However, to help pay for the 100 per cent tax relief, the annual pension limit will need to be reduced dramatically from the current £255,000 a year to a £30,000, £20,000 or even £10,200 a year. Every individual could have an annual pension allowance, as with Isas.

To further encourage lower earners to invest, pension savings up to a certain level must not be taken into account when determining means-tested benefits. It is ludicrous that those who save something get no benefit over those who save nothing at all. We need to encourage a savings culture.

For too long, politicians have played politics with pensions. The result is a generation of people who are disengaged from the industry and a state pension that will not be able to cope with the burden of an ever-ageing population ill-prepared for retirement. This is why we need to take action now.

Martyn Laverick is marketing director at AWD Chase de Vere


News and expert analysis straight to your inbox

Sign up


There are 6 comments at the moment, we would love to hear your opinion too.

  1. Julian Stevens 9th June 2010 at 4:09 pm

    To say that the government “tried with stakeholder pensions and pension simplification” to reverse the decline in the public’s appetite for saving into a pension plan is charitable (for want of a better word) in the extreme.

    Virtually everybody with any experience of dealing with the public must have tried to tell the government that, for a whole variety of reasons, stakeholder would flop. And it did.

    Even more people have been trying to tell the government for years that the pensions system was is drastic need of simplification. So what did Labour do? Made it even more complicated under the phoney banner of simplification.

    I cannot see why anyone should be afforded 100% tax relief on pension contributions, least of all at a time when tax relief for high earners is poised to be cut and the last thing the national economy can afford just now is any sort of tax giveaways.

    As for lack of confidence in the industry, much of this I suggest has arisen from over-zealous and persecutory regulation by hindsight. How many people who’d been advised to transfer our preserved occupational pension benefits (in most cases in accordance with the best known standards of the day) were then bought back in only for the scheme subsequently to wind up insolvent?

    What the industry needs more than ever are massive and genuine simplification, along with root and branch reform of the current completely out of control and unaccountable regulatory framework.

    If anyone wishes to offer a compelling argument to the contrary, I will be pleased to read it.

  2. I have been saying for years that the tax relief given on pension contributions is skewed unfairly towards higher rate tax payers.

    At a recent AIFA meeting i suggested that relief should be given at 100% until the fund reaches £20K then 80% until it reaches 50K 40% until the fund reaches £100K then it would be 20%. Making something cheap doesn’t encourage the population to save, bring in the 100% tax relief, encourage the old life companies back into the market and we could see a comeback of saving for retirement.

    The reality is that taking current estimates into account 50% of population could be reliant on means tested benefits by 2050. If people had sizeable pots this would allow them to break free of the means testing stranglehold that at present discourages many of the population not to save. To also encourage the population to save the State Pension Age should be raised to 70 and this needs to be advertised to bring personal responsibility back and that the state will help those who want to save whilst being a safety net fo those that cannot.

    To encourage higher rate taxpayers give them the option of not having any tax relief but allowing free of IHT to pass on part of fund to children subject to a mximum pot.

  3. Incentives are fundamental to this, as is quality advice so that “people” really do stand a chance of receiving a benefit at some time in the future.

    That incentive could also be a combination of the current pension rules and ISA rules.

    How about 20%/ Standard rate (?) tax relief at the outset, and tax free income (including lump sum) when benefits are taken.

    An immediate benefit to get things going and a real reason to keep things going to the end.

    Decent annuity rates would also help but you can’t have everything!!

  4. Colin Tomlinson 9th June 2010 at 4:56 pm

    How about 20% tax relief and you can take your tax free cash whenever you like, provided you leave the residue to age 55/60 whatever before you can generate an income.

    Decent immediate incentive to save whilst forcing people to plan for retirement.

  5. How about no tax relief on pension contributions, either for companies or for individuals, leaving the pension “wrapper” tax free and make all withdrawals tax free. Freeze the existing position for current schemes and start afresh. That´s what they did in New Zealand!

  6. Anon @ 8.49pm.

    Sounds a bit like the existing ISA regs which for the majority is more than enough to accomodate savings limits/ disposable income.

    Serious retirement planning requires immediate incentives either from the govt in the form of tax releif or matching contributions from employer schemes (BOGOF).

    The validity of pensions is shot to pieces already (annuity rates/ complexity/ restrictions/ bad press) and if the govt only provides 20% relief on pensions for individuals who will be paying higher rates of tax in retirement and that could even include 20% tax payers is basic rates rise then what is the benefit of continuing to subscribe to any form of pension?

Leave a comment


Why register with Money Marketing ?

Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

News & analysis delivered directly to your inbox
Register today to receive our range of news alerts including daily and weekly briefings

Money Marketing Events
Be the first to hear about our industry leading conferences, awards, roundtables and more.

Research and insight
Take part in and see the results of Money Marketing's flagship investigations into industry trends.

Have your say
Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

Register now

Having problems?

Contact us on +44 (0)20 7292 3712

Lines are open Monday to Friday 9:00am -5.00pm