For the second time in two years, George Osborne has produced a budget that will radically change the way we thing about retirement saving.
If 2014 was the year we re-thought the way we spent our retirement spending, 2015 asks us to change the way we save for our later years.
The retirement savings business will change between 201o and 2020 in three fundamental ways;
- The provision of corporate guarantees on retirement income (DB) will have collapsed. By 2020, DB will be a legacy management issue for employers in the private sector.
- The state pension will have been simplified and re-rated by the triple lock. Whatever happens in 2016, four more years of real increases will make state provision more valuable
- Auto-enrolment will make participation rates in the new DC saving regime pretty well universal, those “out” will have some questions to answer.
The new environment is a platform for yet more radical change. The current pension system delivers to those with net available income, substantial tax breaks. For those at the bottom of the income scale, there are tax breaks (unless the employer offers a net pay system) but little net available income to benefit from them. The system is skewed to the “haves” and the proposals on the table from the Treasury, set out to redistribute from rich to poor.
As with the move to the “living wage”, cyncics will argue that Osborne is cutting off the oxygen supply to the left- by adopting a radically left-wing position (which happens to net the Government significant immediate tax gains).
I am not that cyncial. If we want to boost the state pension then we need money to do so, taken together – a pension savings system that credits those who need help with more is badly needed. Pension inequality is Britain is very obvious.
When the dust settles, we will see that this budget has brought in many more at the bottom of the income ladder- into funded pensions- via auto-enrolment.
The budget will have initiated a real debate about how public funds are used to incentivise long-term retirement saving.
And we will have an overhaul of all the complex nonsense that has built up over the past fifty years resulting from the battle of those with money to use pensions as a tax-avoidance scheme.
If you think I am joking , then read the 8 questions that the Treasury Consultation asks us. They will leave you in no doubt that , when the dust settles, things will be very different.
The Treasury’s eight questions
1. To what extent does the complexity of the current system undermine the incentive for individuals to save into a pension?
2. Do respondents believe that a simpler system is likely to result in greater engagement with pension saving? If so, how could the system be simplified to strengthen the incentive for individuals to save into a pension?
3. Would an alternative system allow individuals to take greater personal responsibility for saving an adequate amount for retirement, particularly in the context of the shift to defined contribution pensions?
4. Would an alternative system allow individuals to plan better for how they use their savings in retirement?
5. Should the government consider differential treatment for defined benefit and defined contribution pensions? If so, how should each be treated?
6. What administrative barriers exist to reforming the system of pensions tax, particularly in the context of automatic enrolment? How could these best be overcome?
7. How should employer pension contributions be treated under any reform of pensions tax relief?
8. How can the government make sure that any reform of pensions tax relief is sustainable for the future?