Any simplified pensions system should reflect the needs of the many who cannot afford to abuse the system rather than the minority who are able to manipulate their financial affairs to attract undue tax benefits
UK pensions need to be simplified. We know this is true because our government has said so and the media goes along with it too, so it must be the case.
I think we need a simple and fair pension system too and so do most of the pensions people I know, so that confirms it ' we need a simple pensions system.
But would we recognise a simple system if we saw one? Do we all mean the same thing when we use the word simple? And what exactly are the complexities everyone is going on about? And anyway, do we need to do a really good job of it? Could we not just tidy it all up a bit and give it a bit of a polish?
The plain fact is the UK urgently needs a new and simple pensions system before it falls behind the pension reforms that are likely to sweep across Europe over the next decade. Europe is looking to build funded pensions practically from scratch ' an enormous task and one that would be made easier if successful models can be imported from elsewhere.
But where can Europe look? It certainly cannot be to the current UK system, which in many ways is a shame because we in the UK are by far the most pensioned people in Europe and have amassed our considerable pension savings in a purely voluntary environment.
The UK financial services industry has done a very good job over the last 45 years in persuading employers and individuals to put money aside for retirement. All of this could be wasted though, if the Government does not get these reforms right.
The current system is widely acknowledged as being complex, confusing and difficult to understand. That in itself makes it hard for people to save for their retirement.
To its credit, the Government has recognised this and we now await the concrete results of their deliberations, particularly those on pension tax reform we are promised by the Inland Revenue.
However, the real test for the Government will be whether we can move to a system that is genuinely new and genuinely simple.
But how will we know whether the outcome actually is simpler and better? How best can we benchmark or test proposals issued in the name of simplification? To enable an objective assessment to be made, Scottish Life has developed four tests that any model of pensions simplification must meet in order to achieve the objectives of really simplifying pensions and encouraging people to save ' the four tests of applicability, transition, fairness and separation.
It is important to understand, amid all the recent talk about the necessity for simpler products to be readily available to the public, that one-dimensional answers to the complexity problem are unlikely to help. It is not much use to offer people so-called simple products if their own past pension histories are complex and diverse.
It is each individual case that is now complex due to the chronic obsession for piecemeal fixes that previous governments have displayed and it is this that needs to be tackled at source if we are to stand any chance of getting things right this time. It was just this point we had in mind when we put our suggested four tests to government in the pamphlet we produced earlier this year.
In essence, we are asking for significant retrospective changes to be made that will dramatically simplify the past pension histories people are currently saddled with, alongside corresponding changes to the way pensions savings interact with the means-tested state support systems that will mean it always pays to save.
In addition, we do not think people should lose out as a consequence of simplification.
Indeed, we think there is a world of difference between simplifying pensions and merely dumbing-down pensions in the name of simplification. We should strongly resist the latter approach if government asks us to give consideration to it.
The current system comprises a number of different regimes. Layer upon layer of legislation has been added, over many years, to limit the potential for abuse of the generous tax advantages available to individuals and companies while, at the same time, continuing to encourage saving and to protect those who do. This has caused much of the complexity inherent in the current system.
A new simplified system should be built for people who could not possibly afford to abuse the system even if they wanted to ' a system for the vast majority of people. But key to this will be to exclude from the new system the relatively few (probably no more than about 2% of the population) who would be able to manipulate their financial affairs to extract undue tax benefits.
A separate system would apply for this small minority of people ' possibly the current system that, after all, was arguably designed with them very much in mind.
Those who can move to the new simplified structure should be required to do so. This would create some difficulties but would not be impossible. But requiring people to move means we cannot ignore the past. To make sure that no one who has contributed to a pension in good faith is worse off in the new system, it must be at least as good as the best parts of the old regimes.
While this may make products more complex to operate, it will make it simpler to encourage those who are currently saving to continue to do so, as well as attracting those who start to save for the first time.
This is the greatest test that any claim to simplification will face ' does it address the issue of suitability as well? Simplifying the pensions system without making it fair will be of little use.
Making pensions simple will not, in itself, make them suitable. At present because of the way in which means tested benefits interact with pensions savings, pensions are not a suitable investment for all in the workplace. The proposed system of Pensions Credit was intended to rectify this, but it does not.
Much of the current complexity in the system comes from the way in which the three pillars of pension provision ' state pensions, occupational pensions and individual pension arrangements ' interact with each other.
These three pillars should be distinct from one another and should be recognised as such by legislation.
All three should be able to exist alongside each other with no reference to each other. There should be no limitations imposed on any one by any other.
These four general principles ' applicability, transition, fairness and separation ' are the only benchmarks against which a simplified system can be judged.
There will be much debate over the next few months on simplification. It is essential for all who participate in these discussions to understand what the changes will mean.
We have a unique opportunity. We cannot afford to waste it. The British people deserve a simple pensions system, for today and for all our futures.
The UK urgently needs a simpler pension system before it falls behind the reforms likely to sweep across Europe over the next decade.
The UK population is by far the most pensioned in Europe and has amassed this in a voluntary environment.
The current pension system in the UK comprises a number of different regimes.
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