Raising the retirement age to 70 should form part of a package of measures to stave off a pensions impasse, business leaders said today.
An end to means testing for the state pension and closing ‘gold plated’ public sector pension schemes should also make up any solution to the looming crisis, the Institute of Directors (IoD) says.
It also highlights the need for a radical transformation in the pension system in order to produce what, it says, will be a simplified and durable regime for the 21st century.
“Tinkering with the current system will not overcome the problems of complexity and pension under-saving. The impact of greater longevity, declining state pension adequacy, savings myopia, under-saving and non-saving pose a very significant challenge, it adds.
Miles Templeman, IoD director general, says: “We really have to start looking at some very strong medicine indeed to cure the UK pension problem. Sacrifices have to be made by all of us here and now for the sake of future generations and the health of the economy. The government needs to make tough decisions that not everyone will be happy with, but make them they must, sooner rather than later.”
The IoD calls for:
The IoD also proposes what it calls constrained compulsion in the form a flat rate contribution. The flat rate contribution, it says, would be likely to generate an annuity income of £30 to £40 per week in today’s prices. The USP and annuity income would then provide a combined minimum income base of £140 to £150 per week in today’s prices for pensioners.
Exempting transfers from an estate into a pension fund from inheritance tax and increasing the size of the tax-free lump sum that can be withdrawn from a pension fund on retirement would also boost support for longer working lives, says the IoD. “Our proposal is that the tax-free lump sum (25% at present) be increased by 5% per annum for each year worked beyond the state pension age, up to a maximum of 5 years providing a maximum tax-free lump sum of 50%, it says.
Moreover, the IoD proposes to boost investment returns by the progressive removal of stamp duty on equities. It argues modelling demonstrates that the historic cost of stamp duty on shares may have reduced the final value of any accumulated fund by up to 10%. Therefore the removal of stamp duty could boost final fund values by 10%.
Templeman says reform has to move up the policy agenda and says employers and employees need to have confidence in the future. “Too many people now think pensions are a waste of time, we have to convince them otherwise. All of us have a part to play in solving the problem. Business especially is ready to work with the government to ensure we all have a prosperous future,” he adds.
Other reforms supported by the IoD include the introduction of auto-enrolment for new employees where pension schemes are in place and adoption of US 401(K) style arrangements in order to permit ‘limited’ in work withdrawals from pension funds, in advance of retirement.
It says individuals should be provided with annual statements showing future income projections from the new USP, together with their private direct contribution provision.
And it calls on the government to publish annual estimates of the total future liabilities of all public sector DB schemes and the closure to new entrants of all public sector defined benefit schemes.
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