NEST is good news – but can’t we make pensions more like ISAs?
The news that NEST has appointed managers for its fund is another positive step towards a better retirement system.
People in the UK aren’t saving enough for retirement, and radical action is needed. The IMA was an early champion of auto-enrolment, which harnesses inertia to increase saving. From the beginning, we argued for NEST when others opposed it. It always seemed to us a no-brainer that a central scheme was the most sensible way of delivering a simple default option for employers that would also be low-cost and portable for employees.
Auto-enrolment and NEST will do a lot to promote the savings habit. But it won’t be the end of the story. Quite simply, the low contribution levels will not deliver adequate retirement income for many people. Those on middle incomes in particular will need to be encouraged to do more.
So the Treasury is now consulting on whether people should be allowed earlier access to their pension saving – one of the more obscure pledges in the Coalition Agreement. The thinking is that people will be more likely to save if they know their money is not irrevocably locked up. Personally I’m sceptical: the evidence out there isn’t terribly convincing.
Ever so tentatively, however, the Treasury paper begins to acknowledge that more radical ideas might be examined.
Here’s one: abolish tax relief on pension contributions. While it has an underlying fiscal rationale in terms of deferred taxation, pensions tax relief is a poor way of incentivising saving. Many people don’t appreciate its value, and the rewards are concentrated at the top end of the earnings scale where people are most likely to save anyway.
Pensions have a bad name – they are too complicated, and too many things have gone wrong over the years. ISAs, by contrast, are widely liked: after all what could be simpler than a savings product with no tax at all, and that you don’t even have to declare on your tax return?
Surely the answer is another no-brainer: make pensions as simple as ISAs. Uncouple them from the complications of tax relief, and use the money saved to give savers a new and much more visible top-up – 30 pence per pound saved, say – for savings that were specially set aside for retirement. People would see the value of the benefit and incentives would no longer be skewed to the better off.
A lot has been achieved in producing a better retirement system over the last ten years, starting with the “A day” reforms in the 2004 Finance Act. But more radical thinking is needed if a comfortable retirement is to be open to all.
Richard Saunders
Chief Executive, IMA
16 February 2011
Richard Saunders
Chief Executive, IMA