The advent of freedom and choice signals to me the UK has finally achieved the pension system economist William Beveridge intended for us over 70 years ago.
His vision was that a subsistence-level state pension would save older people from the ignominy of means-tested support, at the same time providing a solid foundation for those of working-age to build upon with their own voluntary pension savings.
This quote from Beveridge has always rung true for me: “Social security must be achieved by co-operation between the State and the individual. The State should offer security for service and contribution. The State in organising security should not stifle incentive, opportunity, responsibility; in establishing a national minimum, it should leave room and encouragement for voluntary action by each individual to provide more than that minimum for himself and his family.”
Sadly, that ideal was not achieved in Beveridge’s lifetime or in the decades since his death in the early 1960s. However, it is where we are now and I for one am very glad of it.
That said, I was horrified by the way the freedoms were announced. A few short words in a crowded Budget speech and our pension system was fundamentally changed. Changed for the better, yes, but changed so unexpectedly and suddenly it made me realise how fragile and ephemeral the whole system is.
Our pension system is something we rely on for security in old age. It is the home of our lifetime savings for our future wellbeing; lifetime savings we each only have one lifetime to accrue. Yet the rules governing the money we save for decades can be changed at the drop of a hat.
What other changes can we expect? Should the whole basis of pension savings be changed from an exempt-exempt-taxed model to a taxed-exempt-exempt one? Do we need National Insurance and income tax? They are the same thing, so some say. Why not merge them?
Merging tax and NI would be easy enough to achieve. We would lose the contributory principle but no one really knows what that is these days anyway, so I doubt it would be missed. But the state pension age is not only the (ever-increasing) age at which we access our state pension entitlement but also the age at which we cease paying NI (but not tax).
Would any future merger of tax and NI mean people over the state pension age would pay a lower rate of tax than people under it? I would certainly hope so. Who knows? It may never happen. But then again it might.
And that is exactly the problem. Our pension system could change in any number of fundamental ways at any time.
Given the potential for sudden change, I marvel at the fact financial advisers can give advice to people on pension savings they will not access for decades hence. But advise they do and we are lucky to have such professionals to turn to.
But it does make me think about those who cannot access advice. How are they to make heads or tails of such a constantly changing and insultingly complex pension system? Surely it does not have to be like this.
Steve Bee is director at Jargonfree Benefits