WHEN the Pensions Policy Institute warned last month that millions of people were heading for an impoverished retirement it was sadly telling us what we already knew.
That few eyebrows were raised at its report underlined just how desperate the state of long-term saving has become in the UK, with regulators and politicians having spent the past two decades diligently chipping away at confidence and trust in the pensions system.
People are completely fed up with pensions, and who can blame them? Surely it is time for a radical shake-up to the rules surrounding pensions to make them more simple and appealing for everyone.
Any changes must satisfy the two seemingly conflicting parties concerned: individuals wondering if pensions are worth bothering with, and politicians who have to balance the books.
The following proposals would achieve this:
1. Scrap higher-rate tax relief on pension contributions – it’s been talked about for years and should appeal to all political parties as it is not seen to be helping the rich. It would also allow genuine pension simplification (with further considerable savings in administering maximum contributions, lifetime allowances etc) and permit the following changes.
2. Allow a one-off withdrawal at any time from an individual’s pension fund of up to, say, 20 per cent, for example to help with university fees or start a business. This lump sum would be taxed at 25 per cent (paying back the flat rate 20 per cent tax relief previously granted on the contributions into the plan). More people would save in a pension if they knew the money was not tied up till 55.
3. Pass your pension fund to your children’s pension when you die. Currently you can leave an income drawdown pension fund to anyone if you die, subject to a 55 per cent tax charge. However, if tax relief on contributions was limited to 20 per cent for everyone, this option could be brought in line with inheritance tax at 40 per cent. If your pension fund was bequeathed to your children, you could limit the tax at this stage to 20 per cent while boosting pension savings for future generations.
These simple proposals would encourage more people to start saving in pensions in the knowledge that the money is not completely tied up till they retire, and parents can provide for their children.
The taxman would be better off immediately due to the end of higher-rate tax relief, while costs would be cut as a result of the administration being simplified. Politicians of all shades can get behind this as a plan which reduces dependence on future state handouts, and could actually raise more tax if there is 20 per cent payable on the value of pension funds every generation.
Graeme Mitchell is managing director at Lowland Financial in Galashiels. www.lowlandfinancial.co.uk