If pensions are not to be made compulsory, however, then let us at least make sure that there is satisfactory incentive for people to save by simplifying the procedure and cutting the costs.
The current tax rules provide what should be adequate incentives - tax relief is given on contributions, the cash invested is allowed to roll up tax-free, and although pensions in payment are taxed as income, pensioners can take a lump sum in tax-free cash when they retire. However, the complicated system of rules surrounding pensions must be changed.
Layer upon layer of tax rules have evolved to prevent people over-providing and getting an unwarranted tax subsidy. The complex rules governing who can contribute how much to a pension certainly get in the way of what should be a straightforward process of setting aside money for retirement. Why persevere with complicated artificial limits when, for most people, a finite disposable income sets a real limitation on contributions?
Why force people to stop their personal pension because they join a company pension scheme? Company scheme members can contribute to a free-standing additional voluntary contribution scheme (FSAVCS) which is similar, but is governed by different legislation. Why force people through this tortuous process when the aim is to encourage people to provide for their retirement? Is there really a need for personal pensions and FSAVCS? Why not have a unified structure?
The Labour Party has proposed a new second-tier pension. The aim is to provide better value for money for people who do not have access to company occupational schemes, through new low-cost funded schemes. These schemes would take more than one shape and could be administered in several ways by insurance companies. Industry-based schemes might be run by unions or employer organisations and local schemes possibly promoted by chambers of commerce.
Labour have criticised the high charges in personal pensions and would like to lure potential pension policyholders into these proposed new low- cost funded schemes. The accusation that 25 per cent of a personal pension fund is swallowed up in charges has been met with some criticism within the insurance industry. The apparent cost is a result of the action of compound interest and hence distorted by time. It should be remembered that not all costs are commission and marketing. Costs are also incurred in administration and fund management. Clients would not welcome cost- cutting at the price of poor administration or inferior fund management.
People are, however, frightened of making long-term commitments. Money invested in a pension fund in most cases cannot be reclaimed to meet other financial needs. No one knows what their circumstances, their health or wealth is likely to be when they retire, or how long they might live to enjoy the pension they have paid for.
The ability to access capital could lead to a short-term attitude, rather than disciplined long-term retirement planning. If pension funds were accessible, people may be prepared to contribute more as they would know they could get at their money. However, there should obviously be a limit to the amount that may be withdrawn and the frequency of withdrawal ... not too much, not too often.
Whatever the future brings there must be political consensus on the future of UK pensions. Pension planning entails making long-term commitments. People must feel confident that their plans will not be changed every time there is a change in government. There is a need for bi-party agreement on the future direction and evolution of the pension industry.
Martin Jones is head of marketing at Abbey Life in BournemouthReuse content