Julian Knight: Why we can’t force people to pay up for their pensions
Making them compulsory will be seen as yet another tax ... and beware the consequences
Saturday 25 January 2014
Think tank the Policy Exchange says it would like to see the Government scrap the right of workers to opt out of workplace pensions. It argues this is the only way to stop millions sleepwalking to an impoverished old age.
Of course we are not saving anywhere near enough – and if you are reading this and think you are then I suggest you go and have a double check – but there is a big leap from there to compelling people to save.
Any attempt to make pension saving compulsory without an opt-out will be seen as another tax. People could be forgiven for wondering why they are being forced to pay when they already have National Insurance.
In addition, it will wipe a huge sum from people’s disposable income – I can imagine scenarios where people get into debt, perhaps even with high-cost credit, because they aren’t bringing home enough money each month because of pension deductions.
And what will this do to the reputation of pensions? You may think they can’t sink much lower but if saving in one becomes compulsory then you could even see protests and disobedience.
Now I have heard many within the pensions industry state it is almost a given that people will eventually be compelled but surely we are missing the point. The best means of changing habits and people’s priorities is through incentive rather than compulsion. The tax breaks are good with a pension but the cost in terms of personal financial freedom are often too great.
With an Individual Savings Account (ISA) you don’t get the upfront tax relief but you do get tax-free growth and can access your funds any time. If we just freed up pensions in the same way, almost overnight you would transform public perceptions.
Sure people could be auto enrolled into their workplace schemes (which is happening at the moment anyway) but they should have the right to choose to spend the money they have earned on buying a home or feeding their kids. Let pensions go free and people will start to appreciate them.
Carney’s in a corner
Mark Carney has painted himself into a corner. He has done this by previously stating that he will be looking at an unemployment rate of 7 per cent as the trigger point for a potential rise in interest rates.
Almost from that moment the jobless total has nosedived. So much so that the 7 per cent figure – supposed to be breached at some point next year – is likely to go next month.
If he doesn’t discuss raising rates with the Monetary Policy Committee, the relatively new Bank of England Governor will have to explain to markets why he has abandoned his 7 per cent measure. And central bankers don’t like admitting they are wrong.
Meanwhile, very ironically, the rate of inflation – which was always the key benchmark for the independent Bank of England – has dropped to within limits. In fact, the UK is enjoying the lowest rates of inflation since the financial crisis and to add to this the pound is at a five-year high against the dollar, already hurting exports.
In short everything – unemployment excepted – points firmly towards rates remaining where they are. To raise rates now would damage the finances of millions of Britons and potentially kill the recovery. Yet either next month or the month after Mr Carney will have to at least have the conversation with his committee.
The quite startling fall in unemployment makes it much more likely interest rates will rise later this year rather than next. And although this will be good for savers, those who have failed to use the past few years of artificially low interest rates will suddenly have to pay a price. It may not be pretty.
Young must help themselves
Like the idea of Help to Buy? Well if you do, credit reference firm Experian warns that many younger people are not thinking enough of boosting their credit score. Basic stuff such as being on the electoral roll is being missed and could stop their Help to Buy ambitions. But remember it isn’t the only game in town - there are better deals with high loan-to-value available that aren’t under its umbrella .
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