Who and what are pensions for?
The most telling comment in the IFS’ most recent output is a quote from their “Death Taxes and Pensions”
we currently have ‘the bizarre situation where pensions are treated more favourably by the tax system as a vehicle for bequests than they are as a retirement income vehicle’.
If we are to have a philosophy of pensions, then it should lead to a common statement of purpose as it has in Australia. We needn’t get hung up on the phrasing , but we must tied down the “who and what”.
In my view of pensions, they are about providing dignity in retirement through the payment of income that lasts as long as the pensioner.
This is an exclusive definition because it does not include a statement about “savings” or “wealth” and it excludes the mitigation of death taxes from what pensions are for. If the wealthy want to have pensions, good. But they should not confuse them with bequests.
Pension is not about savings
There are two ways of getting a pension. You can either buy it as you go along – which is how you get the state pension and how a defined benefit or CDC scheme works. Or you can buy one out of your savings, which is how DC pensions use to work and should work in future.
Pensions are not savings, no matter what the Pension and Lifetime Savings Association would have us think. Like the ABI, they have confused pensions with wealth and forgotten the fundamental point of a pension – an insurance against living too long.
Of course savings are important in retirement, but they are different from the pension. I am not opposed to the spirit and sentiment expressed in this statement by the ABI (and by association the PLSA). But the lack of definition is alarming. Savings and investments are not the same as pensions but we have conflated the two and are confusing ourselves and our customers.
I take issue with the idea of putting “savers” at the heart of any pension policy. The heart of any pension policy is the pensioner.
Should pensions be a store of inheritable wealth?
The current system puts too much stress on retirement saving and too little on insurance against old age. We have forgotten the “who and what”. Pensions are for people who want and need a replacement income in retirement. They provide an income that lasts as long as the pensioner does (with protection for couples).
People can opt out of pensions using their pension freedoms and many rich people whose income needs are taken care of elsewhere, may opt out. But they should not be incentivised to opt-out by a tax-system that encourages pension money to be redirected to finance inheritance.
The debate we are having prior to the July 4th election is about pensions – the state pension. The state pension is not inheritable (other than to spouses). The public understands pensions in terms of the state pension and the works pension paid on top by an employer through a company pension scheme.
Retirement savings no longer purchase pensions or their insurance derivative – annuities.
There is a strong and vigorous lobby to protect retirement savings as a means of tax-free bequest, but as the IFS points out, this is at the expense of pensions. Pensions must be exclusive and not be confused with savings and wealth. If you are saving for wealth – good luck to you, but you should not be getting an exemption on the transfer of an intergenerational transfer of that wealth when you die.
If we want to move to a proper pension system, we must focus the tax efficiency of the pension system on the payment of pensions and stop rewarding the savings and wealth lobby with pension tax incentives.