Here’s a question for anyone interested in pensions in this country
What would you prefer?
- Higher taxes, a bigger state pensions and no requirement to save into a private pension.
- Same taxes, same state pensions and impulsion to save into a private pension.
This brilliant question was put to a group of the “great and the good” by economist Paul Johnson at a recent meeting at the Department of Work and Pensions.
Out of an audience of 50, 48 voted for option 2 and two lost souls (of which I was one) voted for option 1.
It is almost certain that Britain will adopt auto-enrolment and it is better option than sticking with our current system (which isn’t working). This blog’s about the big policy decisions and why auto-enrolment is not a panacea to pension poverty.
We face a big and growing problem with poverty in old age. It’s big because many of the poorest (and some of the most feckless) members of society have built up no retirement savings and are now finding themselves living on a relatively poor state pension.
It’s going to get bigger as the “gold-plated” final salary schemes on which the current crop (cohort to actuaries) of retirees fall away.
The Government’s big idea has been to shift the risk for retirement provision by devaluing the state pension and by making it easier to save into private pensions.
The first shot was the Stakeholder Pension, which was a big flop, mainly because the insurance companies really didn’t want to offer sophisticated pensions at tight margins to people with no money to save.
They are now having a second shot at the problem by requiring all employers to offer people who don’t have a proper pension scheme a decent pension and pay something into it.
The Government’s other big idea is to create a decent pension for this money to be paid into. This decent pension is going to be called NEST- it’s designed not to discriminate against people with little to save.
But a large number of people don’t have very little to saves they have nothing to save. For the people on very low incomes either because they are part-timers or carers or unemployed or long-term sick, it’s going to do nothing at all. because you can’t save out of income if you don’t have an income.
For another group of people, the self-employed who are notoriously bad at saving, it’s not going to be an option.
For a third group of people, who’ve pinned their hopes on their property or business or children providing them with a retirment income, there will be an option to opt-opt of these ideas.
The group of people who will benefit from the proposed reforms are the people who have ducked retirement saving because they couldn’t be bothered. The third and most important strand of the proposed reforms is called “auto-enrolment” and it’s being phased in from 2012. Auto enrolment means that you are going to have to work pretty hard not to find yourself saving for retirement.
It works like the software update that flashes up on your screen. If you can be bothered, you can get rid of the pop up message and soldier on. But you’ll feel a little guilty that you might be missing out or exposing yourself to a virus so the vast majority of people will just accept the update. Even if you turn down the update first time around , the message comes up again and again….and again.
In order to avoid being in a pension a good existing one or this NEST pension, you are going to have to fill out a form saying
NO I DONT WANT YOUR PENSION AND I DON’T WANT LOTS OF FREE MONEY FROM THE TAXMAN AND MY EMPLOYER.
Even if you do this once, the chances are you will have to do it again in three years time, or when you next change jobs .
There will soon be three certainties – DEATH TAXES and AUTO ENROLMENT.
Now you might ask what is wrong with that;- it is the option 2 that 48 out of 50 people voted for.
This is what made me say I’d rather see higher taxes and a decent state pension
- Auto-enrolment is going to be complicated-it will make pensions more complex not more simple
- Most people don’t need auto-enrolment to be sensible about joining a pension
- People who are not sensible would almost certainly do better by paying more tax and getting a proper State Pension
- It will leave many people who don’t earn enough to be properly auto-enroled with the same old rubbish State Pension.
We are chosing to put clever pension ideas in front of boring but sane collective provision as Beveridge originally conceived.
