Negative headlines are nothing extraordinary when it comes to pensions, writes Jenna Towler
But two in particular caught my attention last week. The first let the British population put the quality of their state pension entitlement into perspective, in that Mexico is the only country in the ‘developed’ world with a poorer salary replacement rate than good old Blighty.
While that might not be the ideal headline for the government, it has a cunning plan… Auto-enrolment is being rolled out to take care of the issue. The government has been on a clear path to redistribute the responsibility for retirement income from itself to private savers for many years and, while the state pension is being changed for the better, people do now know it is not enough to retire on.
Pushing people to save is never going to be easy and, of course, it has to be a gradual process. But the eventual endpoint – 8% contributions based on qualifying earnings – isn’t exactly going to change the world either.
Scary numbers about how much people my age (let’s just say in their 30s) will receive are often bandied about. I was told about 26% of salary last week, to my horror. This also is an impossible dream for many.
What a relief...
Which leads me on to the next headline, which suggested "expensive and regressive" pension tax relief should be overhauled to help cut the fiscal gap.
An independent think tank, Reform, made the suggestion and, while it was at it, said pensioners should start paying National Insurance contributions too. The latter is a surefire vote loser – no sane political party would introduce this policy in the current austere environment.
But back to tax relief. At present, the country’s wealthiest savers get the biggest breaks on their pension tax relief and it is an expensive policy, costing the government about £24bn a year net, according to estimates.
Successive governments have tweaked the rules, bringing down the annual allowance significantly, for example. But the EET system, where contributions and investment returns are tax-exempt and withdrawals are taxed, has been in operation for many decades.
Reform said most of the relief (61.2%) is received by people aged 35 to 55 and nearly 20% by people below 35.
So any changes, such as a move to a single rate outlined earlier this year by the Pension Policy Institute would mainly affect younger people. This raises the issue of generational fairness.
Setting aside the potential vote-losing scenario of further cutting pension tax relief, it is unlikely that making the system even more complex than it is at present is attractive. Higher-rate taxpayers are not necessarily the extremely wealthy, and they need to be encouraged to save for retirement too.
Although expensive to government and at present skewed, pension tax relief is an integral part of the pension system, which is not well understood by savers themselves.
In defence of pension tax relief
An ambitious objective
'Something completely new'
'Illusion of control'
Reasons to be cheerful
Total investment reaches £9m