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Surefire route to simpler pensions

The UK needs a new and simple pensions system. The current system is widely acknowledged as being complex, confusing and difficult to understand.

That makes it hard for people to save for their retirement. To its credit, the Government has recognised this and we now await the results of the different simplification reviews.

Following this, the Government is expected to publish its proposals for change, probably as a Green Paper before the end of the year. The real test for the Government will be whether we can move to a system that is genuinely new and simple.

But how will we know whether the outcome is simpler and better? How best can we benchmark or test proposals issued in the name of simplification?

To enable an objective assessment to be made, Scottish Life has developed four tests that any model of pensions simplification must meet in order to achieve the objectives of really simplifying pensions and encouraging people to save: the four tests of applicability, transition, fairness and separation.


The current system comprises a number of different regimes. Layer upon layer of legislation has been added, over many years, to limit the potential for abuse of the generous tax advantages available to individuals and companies while, at the same time, continuing to encourage saving and to protect those who do. This has caused much of the complexity inherent in the current system.

A new simplified system should be built for people who could not possibly afford to abuse the system, even if they wanted to. But key to this will be to exclude from the new system the relatively few (probably no more than about 2 per cent of the population) who would be able to manipulate their financial affairs to extract undue tax benefits.

A separate system would apply for this small minority of people – possibly the current system which, after all, was arguably designed with them in mind.


Those who can move to the new simplified structure should be required to do so. This would create some difficulties but would not be impossible. But requiring people to move means we cannot ignore the past. To make sure that no one who has contributed to a pension in good faith is worse off in the new system, it must be at least as good as the best parts of the old regimes.

While this may make products more complex to operate, it will make it simpler to encourage those who are currently saving to continue to do so, as well as attracting those who start to save for the first time.


This is the greatest test that any claim to simplification will face; does it address the issue of suitability as well? Simplifying the pensions system without making it fair will be of little use.

Making pensions simple will not, in itself, make them suitable. At present because of the way in which means-tested benefits interact with pensions savings, pensions are not a suitable investment for all in the workplace. The proposed system of pension credit was intended to rectify this but it does not.


A lot of the current complexity in the system comes from the way in which the three pillars of pension provision – state pensions, occupational pensions and individual pension arrangements – interact with each other. These three pillars should be distinct from one another and should be recognised as such by legislation.

All three should be able to exist alongside each other with no reference to each other. There should be no limitations imposed on any one by any other.

These four general principles – applicability, transition, fairness and separation – are the only benchmarks against which a “simplified system” can be judged.

There will be much debate over the next few months on simplification. It is essential for all who participate in these discussions to understand what the changes will mean.

We have a unique opportunity. We cannot afford to waste it. The British people deserve a simple pensions system for today and for all our futures.


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