commentator andrew dilnot believes younger savers would be better off investing in Isas
Pensions commentator Andrew Dilnot has argued Isas are a better retirement savings vehicle than pensions for many investors.
Speaking at a briefing for actuarial consultants Towers Perrin, Dilnot said many younger employees invest in pensions which are often inappropriate to their circumstances.
He said: 'Employers are, in effect, forcing saving through pensions. It will often be better for those on moderate incomes to save in an Isa and invest the sum accrued later in life.'
Dilnot suggested employers could offer workers the option of taking a lower sum to invest in a different savings vehicle if they felt a pension was not appropriate for that stage of an individual's life.
Dilnot pointed to the steady increase in savings through Isas and their equivalents over the 10 years up to 2001. He said this trend is expected to continue while the sums invested in pensions may decline. Both he and Mark Duke, a principal at Towers Perrin, were particularly sceptical about the future role of trustee-based employer pension schemes.
Duke said: 'I think trustee-based occupational money purchase schemes will gradually die out to be replaced by group personal pension schemes that give employees more choice on where their money is invested.
Duke conceded this shift would leave the employer with the problem of deciding how its employees should get advice. He said employers may decide to give partially subsidised advice through intermediaries but it is unlikely this would lead to the end of commission-based remuneration.
Dilnot believes the pensions green paper will hasten the departure away from trustee-based pension schemes by simplifying the tax regime.
Duke acknowledged the shift away from trustee-based business would present significant challenges for actuarial consultants as advice would be needed on a more individual basis.
The fees charged by consultancies are too high for individuals and actuarial firms would have to change their business models to succeed in the new environment, he added.
Intermediaries would have a role, Duke said, but he doubts whether the sector would grow substantially.
The Government has declared the basic state pension will no longer provide the basis of retirement income for the less well off, according to Dilnot. He said the introduction of the pensions credit will lead to a huge increase in the number of people being means tested. This would increase the need for real private savings, he said, adding the flat rate of the state second pension would make the decision of how to invest more important.
He said encouraging people on the lowest levels of income to invest in pensions would not succeed, as pensions are not a rational investment for them.
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