David Prosser: Reform the tax system and deliver a decent pension for all

Devastating new research from Datamonitor could be the final nail in the coffin for the Government's ailing pensions policy.

Devastating new research from Datamonitor could be the final nail in the coffin for the Government's ailing pensions policy. The market analyst says stakeholder pensions, launched four years ago as the solution to the country's savings crisis, have comprehensively failed.

After a strong start in the year the Government launched stakeholder pensions, sales have fallen dramatically. The number of plans sold dropped by 6 per cent a year between 2002 and the end of last year. During a period when financial experts have repeatedly warned that people are not saving enough for old age, sales of the Government's flagship pension product have collapsed.

We shouldn't be surprised by this disaster. Stakeholder plans appealed to savers who were already contributing to pensions, because they were a low-cost version of older products. But they did nothing to address the fundamental reasons why people aren't saving enough.

One problem is that many people just do not have enough spare cash to save for the future. This group includes many younger workers, who are often earning low salaries or struggling to repay student loans. Women are also over-represented in the "can't afford to save" category.

There is an even larger group of people who can only afford to put by relatively small sums. These savers face another huge problem: the ridiculous complexity of pensions, especially the interaction between the state and private-sector systems.

Currently, the state pension rules mean modest savers lose out. While poorer pensioners are entitled to claim the means-tested pension credit, by saving for old age, they disqualify themselves from this cash. So, unless you're confident of comfortably putting by more than you would get from the pension credit, you might as well not bother.

Without reform of the state system, there is little hope of any improvement in private pension saving. It's therefore encouraging that Tony Blair this week backed the idea of an automatic state pension paid to everyone over a certain age - pensioners would qualify through a basic residency test, irrespective of the National Insurance contributions they had made. Less happily, he quickly pointed out that a universal pension would cost several billion pounds more than the current set-up. He warned the cost could be prohibitive.

There is one obvious way to pay for more generous state pensions. The tax reliefs available to savers who pay into private pensions cost the Treasury a staggering £19 billion a year. The money is meant to be an incentive to save, yet the vast majority of those who contribute to private pensions would be providing for their old age even without these tax breaks. Perversely, higher-rate taxpayers - who need the least help to save - get the most generous tax breaks.

There is nothing to stop us reallocating some of the cash currently being wasted on pension tax relief. It could be used to underpin a universal pension generous enough to enable us to do away with means-tested benefits for pensioners.

The transformation would be remarkable. Everyone could look forward to a decent basic income in old age - including those who can't afford to save for a pension. Those who could afford to put by extra would do even better, free from anxiety about losing access to complicated means-tested benefits.

* Car dealers' reputation as sharks may not be entirely deserved, but there's no doubt that they charge way over the odds for finance. Yet two-fifths of car-buyers still take the loan on offer at the showroom.

Analyst MoneySupermarket cites the cost of buying a Ford Mondeo. Drive away with Ford's own finance package, costing 15.1 per cent a year, and your new wheelscost £22,500. Buy with a cheap personal loan, at about 6 per cent, and you pay £20,200, saving more than £2,000.

Car-buyers think long and hard about a new vehicle, but then sign up in an instant when they're offered an expensive finance package. If you plan to buy a new motor, now that March's 05 plates are available, sort out a cheap loan before you set off for a test drive.

Do your homework to beat the banks

Britain's biggest banks have been quick to point out that a large chunk of their mammoth profits is made outside of this country. Of HSBC's £9.2bn profit unveiled on Monday, for example, only £2.6bn was generated here.

Even so, there's no getting away from the fact that the banks are doing very nicely out of us all. But while it's right to get cross when this exploitation is exposed, we often have only ourselves to blame.

For example, despite a two-year campaign from Which? to persuade people to switch current account, the biggest banks retain 70 per cent of the market. Similarly, Barclaycard remains dominant in the credit card sector, despite rarely offering the best deal. Too many of us automatically troop down to our local big bank, whatever our financial need.

Maybe a lack of financial savvy is to blame. On-line bank Egg has been testing the nation's financial IQ with relatively simple questions about interest rates and inflation. The average Briton scores a pretty dismal 56, out of a possible 120.

You can sit the test for yourself online at www.financial-iq.co.uk. Use the results to identify your weak spots and then do some homework.

It's your only option. The big banks may not enjoy being criticised for profiteering, but they won't be shamed into action.

The only effective way to force them to offer a better deal is to take your business elsewhere. And that means knowing how to work out when you are being ripped off.

d.prosser@independent.co.uk