A combination of higher taxes and National Insurance contributions, raised retirement ages and increased personal savings is needed to fill the pension gap, says pensions tsar Adair Turner.
His interim report published this week, Pensions: Challenges and Choices, says any one of these measures will be insufficient to address the problem and a combination of all four is needed.
The Pension Commission chairman says policy recommendations will not be made until after the general election, expected in May 2005.
He says members of defined-benefit schemes are broadly saving enough but up to 75 per cent of defined-contribution scheme members are not saving sufficiently for retirement.
Turner says low earners make up the bulk of the 9.6 million individuals who are saving insufficiently and that Government measures such as stakeholder, state second pension and pension credit have failed to close the savings gap.
He believes insurance companies which distribute their pensions through IFAs are too expensive and the industry must assess whether it can provide low earners with an advice-based service. The report says the UK pension industry needs a radical overhaul if workers are to have a decent standard of living in retirement.
Turner says anyone buying a stakeholder pension levying a 1.5 per cent charge and providing realistic after-fees returns of 3-4 per cent annualised will typically lose 25 per cent of their pension pot in charges by maturity.
Some of those most in need of saving for retirement are also being disincentivised by means-testing, the scope of which will grow over time if current indexation approaches continue indefinitely.
Turner says: “Means-testing within the state system both increases the complexity and in some cases reverses the incentives to save via pensions which the tax system creates.”
Hargreaves Lansdown head of pensions research Tom McPhail says: “I am quite confident there will continue to be a role for IFAs in the UK pensions system but most will struggle to make a living out of it.”