The Government is leaving itself open to accusations of a future misselling scandal if it allows Personal Accounts to go ahead in their current form, according to an influential think tank.
In a report commissioned by the Centre for Policy Studies, former investment banker Michael Johnson suggests major reforms to Personal Accounts and the state pensions could create a more affordable pensions system which ensures an adequate level of provision for all.
The report, Don't let this crisis go to waste: a simple and affordable way of increasing retirement income, Johnson says the current Personal Accounts structure is ‘fundamentally flawed'.
The ‘spectre of means testing' is a huge disincentive to pension saving, Johnson says, and means many who will save into Personal Accounts will not be significantly better off, despite the extra money they have contributed.
This brings the threat of a future misselling scandal unless low earners are advised to opt out of Personal Accounts.
Johnson suggests Personal Accounts should be replaced by the Flexible Retirement Savings Accounts (FRSA), with a 7% level of gross contributions, comprising of 3% from the employee, a 1% tax credit and 3% from the employer.
This would give all savers a 33% rate of tax relief regardless of their marginal rate, and provide a major incentive for low earners to save, he claims.
The FRSA should also allow greater flexibility in retirement, rather than the default annuity route currently proposed for Personal Accounts. The ability to suspend or vary income after age 75, and transferral of benefits on death free of IHT, would be more suited to modern retirement lifestyles.
Johnson also believes the state pension should be increased for those over 75, allowing FRSA accumulated savings to be focused on the initial 10 years of retirement.
Only a radical overhaul of the state pension, public sector pensions and the proposed Personal Accounts will solve Britain's pensions crisis in an affordable way and avoid a social crisis that could last for decades, the report concludes.
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