Mike Morrison assesses the latest raft of proposed pension reforms
So, here we go – the last few weeks have seen pension announcements galore. We have had the new tax relief rules, the announcement of the change to state pension age, suggestions about how to resolve the issues of public sector pensions and then changes to NEST and auto-enrolment and, perhaps surprisingly, some interesting announcements about state pensions.
Let’s take that last one as a starting point: the announcement to be followed up with a Green Paper, about the basic state pension.
It appears that:
• The basic state pension will be increased to a flat amount of £140 a week.
• This will be based on years of UK residence rather than the contribution record that applies to the current basic state pension.
• It will replace all other state pensions, including the state additional pension (SERPS and S2P) and both elements of pension credit.
• It will probably not take effect until 2015 at the earliest.
This all looks very positive and reflects some of the pre-election political promises. However, it also appears that the new flat rate benefit will only apply to new pensioners and existing recipients will retain their current mix of benefits – and what will £140 look like in 2015?
As usual, the devil will be in the detail, particularly the cost of such a change coming at a time when the public finances are tight and how the new benefit would interact with existing contributors’ contracted-out benefits – will they be on top or taken into account in the total?
My understanding is that simplification is one of the key drivers, as well as addressing the issue of individuals (often women) with incomplete state pension contribution records.
So far, so good. A clear distinction between state and private pension provision would be a positive move, particularly by removing means testing and providing a sustainable level of state benefits subject to fair qualifying criteria.
The creation of a universal state pension would make it significantly easier for people to plan for their realistic retirement income needs.
Add to this, the clarification on NEST and auto-enrolment. In a nutshell, auto-enrolment will be for those earning at least £7,475 with no upper age limit. Employers will have a three-month waiting period to enrol employees and the requirements for a ‘qualifying scheme’, as opposed to NEST, have been clarified.
The hope is that people will join the scheme and stay in it. My concerns are still:
• That many employers will see this as a ‘tax’ and be keen not to spend too much.
• That, if seen as a tax, employers will not understand the potential benefits.
• That there will be some individual people on low salaries for whom the contribution might be low but the expectations high.
• The 2% contribution charge and the relatively ‘cautious’ investment options will only exacerbate the possibility of low funds.
• With no upper age limit there is still the possibility of enrolment for ‘unsuitable’ people.
• Turning a low fund into an income stream – annuitisation or even drawdown – may not be attractive.
It is therefore important that NEST and auto-enrolment are accompanied by a campaign of communication and information to explain the benefits.
So, with what could be a good base, perhaps there could be a couple of further additions, such as a full review of incentives to save with the removal of means testing, and fresh incentives for young savers in order to encourage earlier saving.
We could also recognise the long-term nature of the savings contract and add extra flexibility, perhaps through allowing access to lump sum provision from pension schemes early to fund ‘pivotal life events’ such as the birth of a child, university fees, house deposit, etc.
With all of this, and if NEST gets ‘bedded in’, then perhaps we could be on our way to restoring a savings culture with a clear divide between state and private provision, with people aware of what they might get from each and what they will need to do to achieve a specific level of income in retirement.
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