View more on these topics

Pension Edge: Ros Altmann

Unions are recommending that the government introduce compulsory pension saving for all employees. Such a policy change would make a bad situation even worse, prolonging the current system and postponing the required overhaul.

Our pension system is not working properly, and just compelling people to put money into it will not make it work better. The knee-jerk panic reactions to bad pension headlines, like pension credit as a reaction to the 75p rise in basic pension, make things worse.

We need to radically overhaul the way we think about pensions. We have a retirement problem rather than a pension problem. We are trying to make pensions last too long. It is simply not possible for average earners to save enough during a relatively short working lifetime, to support themselves at a decent income level for 20 or 30 years of retirement. Saving 15 per cent of salary for 30 years will not generate a generous pension to last 30 years.

Compulsion is not the answer. In fact, there are many reasons why it could make things worse.

Compelling people to save 10% or 15% of their salary would be devastating for economic growth, as the Australians found when they introduced compulsion. The sudden diversion of income from consumption to savings would be likely to damage growth severely.

Even saving 10-15% of salary will not guarantee a decent pension later on. People could end up severely disappointed by the amount they receive, since pensions are trying to last longer and longer.

In the current policy environment, compulsion cannot be considered at all. Extensive means testing of older people (more than 75% of pensioners will be entitled to pension credit by 2040) will reduce any final pension income by at least 40%, and for many people could even tax away the whole of the pension. For the majority of the population, pensions are not a suitable product and saving in a different form would be much better.

There is little evidence that compulsion works. It does not appear to raise the overall savings ratio, but redirects saving from one form to another.

Compulsion would be seen as another tax. Even if the contributions only come from employers, this must either reduce take-home pay (if employers keep salaries the same and put 10% into a pension instead of into the pay packet) or job security (if employers are forced to absorb the cost of high contributions).

We already have compulsion, in the form of National Insurance contributions. These would be better used to provide a higher pension, and do away with the means testing for older pensioners.

We are wasting huge amounts of money. We spend £38bn on the basic state pension, but over £20bn on pension tax relief and National Insurance rebates. Diverting the expenditure would free up significant resources. Pay the Minimum Income Guarantee level to everyone over 75, probably on a residency test, and tax it back from those with higher incomes. More than 70% of the over-75s are entitled to MIG anyway.

This could easily be funded by reducing the costs of administering the means test of pension credit – £4 per week, per claimant – plus the phasing out of contracting out. This simple change would be of enormous benefit to pensioners, establish a firmer foundation for encouraging longer and more flexible working lives, and have the following advantages:

1. Abolish the means test for the elderly (defining elderly as over-75).

2. Abolish poverty among the elderly (would pay everyone the MIG, no take-up problem).

3. Establish a clear distinction between the state pension and private provision.

4. Remove the complexity of contracting out (no other country does it and it hasn&#39t worked anyway. Thousands of people who received a contracting out rebate and invested in a pension are being left with less than they would have received from the state – what a waste of public money.

5. The over-65s would still be entitled to the means tested MIG and pension credit, but it would be subject to a means test. This would encourage people to work longer and still target resources at those most in need (it is the older pensioners who are least able to cope with forms).

6. It would make a difference to the pensions of older women. At last, elderly single women – the biggest group in poverty – would be looked after properly.

This overhaul would be affordable because it would redistribute expenditure, and effective because it would not depend so much on means testing, claiming and encouraging take-up.

Ros Altmann is an independent consultant


New full term trackers from Platform

Platform, the intermediary lending arm of Britannia Building Society is enhancing its buy to let range with the launch of two full term tracker mortgages. There are no redemption charges. The rate for full term tracker 1 is the base rate plus 1.35 per cent for the life of the loan. The rate for full […]

HSBC takes straightforward approach as it enters guaranteed product arena

HSBC is entering the guaranteed income bond market and expects to unveil its first offering in the new year. Speaking at the Structured Retail Products Adviser seminar in London, HSBC Asset Management head of UK structured and specialist products Chris Taylor said while income products are a holy grail for the structured market, the current […]

FSA to probe burden of phoenix firms on FSCS

The FSA is to examine the link between phoenix firms and claims submitted to the Financial Services Compensation Scheme and Financial Ombudsman Service. The action has been welcomed by the industry, which has been greatly concerned by the recent trend for firms such as Berkeley Berry Birch to wind up subsidiaries, transfer out assets and […]

A consumer&#39s view

The FSA report on closed with-profits funds provides no comfort for the millions of investors whose money in these funds is languishing, earning little or nothing. About 66 with-profits funds out of a total of 110 funds are closed to new business and about £191bn of investors&#39 assets are locked in, trapped by hefty withdrawal […]


Guide: what you need to consider for your auto-enrolment project

In this guide, Johnson Fleming reveals what items you need to understand to gauge the impact of auto-enrolment on your business. The guide focuses on: the impact that your auto-enrolment scheme will have on you; assessing your workforce; understanding your staging date; reviewing your current provision; and modelling contribution levels and costs.


News and expert analysis straight to your inbox

Sign up


    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