Pensions Week ‘Rethinking Pensions’ proposal
by Dr. Ros Altmann
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Welcome to the modern form of pension – the ‘Lifesaver’.
This is a radical redesign of pensions, removing complexity, increasing flexibility and combining pensions with ISAs – and Child Trust Funds – into a lifetime savings framework, called the ‘Lifesaver’.
Private pensions are really just a special kind of long-term savings – inflexible and locked in for decades. Confusingly, the word ‘pension’ also refers to social welfare. Defined benefit employer pensions encompass both aspects, however, 21st century firms cannot underwrite such open-ended, long-term commitments. Therefore, a reformed state pension must cover basic old age social welfare for all citizens, with additional retirement provision coming from individuals’ own resources – in their LifeSaver.
Everyone would have a Lifesaver, with workers contributing as and when they can. Employers will be incentivised to contribute a portion of each worker’s pay rise, or bonus, into their Lifesaver. Lifesaver contribution levels are therefore affordable, flexible and suitable for all employers and employees, building up over time but minimising the pain of sacrificing current income.
The complex limits and restrictions on pensions and ISAs would be removed, allowing more flexibility at any lifestage. Instead of tax relief, a simple system of matching Government incentives – increasing as money stays invested – should encourage people to gradually lock more money away over time, while retaining withdrawal facilities if needed urgently.
The diagram gives an idea of how the Lifesaver could work.
Child Trust Funds could seed Lifesavers for youngsters, requiring or incentivising money to stay invested at age 18, rather than just spending it all, thus overcoming the inertia that prevents people opening savings accounts.
Such radical changes require increased financial education, and this should form part of the LifeSaver. Workplace seminars, birthday cards, on-line webinars would be standard.
Providers compete to offer Lifesavers, which are completely portable, with charges fully disclosed. They can offer a diversified range of return-seeking investment choices, not just equities, together with default funds, and low risk or capital protected options. Lifesavers would be regulated as other financial products and operate at arms length from employers.
Lifesavers are solely defined contribution, without specific promises on decumulation, although some companies may offer guaranteed options if desired, including future minimum income or capital sums. There would be no mandatory annuity requirement but Government issue of longevity gilts would be a huge benefit.
Lifesavers could even offer lottery prizes to encourage initial interest. Chances to win, say, £1million, a holiday home, a car each month, could offer savers instant, as well as delayed gratification.
A Lifesaver approach is superior to personal accounts, as it flexibly encourages saving through the lifecycle, facilitating increased contributions as salary increases or bonuses are paid, while avoiding means-testing disadvantages on withdrawal.
At older ages, Lifesaver balances will help inform people’s choices about saving more or continuing to work if they have inadequate savings. This simple, clear structure, will allow individuals to assess the adequacy of their life savings and make informed choices about when they can afford to stop working. I believe this will encourage more savings, not less.