Pensions must change, starting with MPs

Published on Friday 7 August 2009 14:54

THE present pension system is not acceptable and has to change.

A growing group of workers, including the civil service, NHS and emergency services, have access to government guaranteed pension benefits while the rest have to rely on personal pension plans which depend on investment returns. The old argument about lower pay for public sector employees is outdated.

I have worked for over 30 years in financial services and seen many changes designed to fix the longer term demographic and funding problems which have now come to a head as a result of the credit crunch.

I would like to propose some solutions:

&#149 Create an independent pension strategy body

Constant change every few years makes sensible planning very difficult. It's hardly surprising that our MPs, with a short-term focus on the next election, repeatedly fail to address problems that could lose them their seats. We need a pension strategy body, free from political interference (similar to the Bank of England) charged with setting a clear medium and long-term plan for pensions.

&#149 Scrap MP's final salary schemes

Abandoning final salary pensions for MPs would help restore some confidence in our law makers and make it easier for them to address the final salary scheme funding for government employees from a position of moral strength. For example, it would seem reasonable to have personal pension arrangements for new employees while preserving the guarantees for existing employees. Perhaps we might see more imaginative solutions if our politicians have a vested interest in personal pensions for themselves. I wonder, for example, how many MPs would consider joining the compulsory private pension scheme they themselves have scheduled for introduction in 2012?

&149 Scrap the requirement to buy an annuity at 75

Clients regularly tell me that they hate the idea that their pension fund cannot be passed on to family members. It is a key reason why people do not invest enough (and in many cases anything) in pensions. Yet our politicians seem to think leaving a pension fund to next of kin is a bad idea.

Also Alistair Darling was quoted in December 2001 as saying that "tinkering with the age at which people can take an annuity would only affect a tiny number of those with a very large pension fund". The average annual income for public service pensions is apparently less than 7,000 a year. You need at least 140,000 to provide a similar income with a personal pension. Sorry Chancellor, options for pensions beyond 75 do not just affect the rich - they are potentially for anybody with an average income trying to maintain their living standards in retirement.

I would therefore propose the removal of the requirement to ever buy an annuity. (There is a Drawdown option post 75 but with an 82 per cent tax on death - it is hardly a viable one). In turn I would insist that the pension fund beyond the latest state retirement age (currently 68) can only provide an income - ie it could never be paid out as a lump sum. The 82 per cent tax on second death should be reduced to 40 per cent, to tie in with inheritance tax. This should satisfy all parties: People would be more inclined to save if the money can benefit both them and their families; pension fund values should increase, generating higher income for generations to come; dependency on state benefits would be reduced, helping bridge the savings gap; and the government would generate more tax.

&#149 Graeme Mitchell is managing director of Lowland Financial in Galashiels. graeme@lowland financial.co.uk