Sunday Telegraph Comment – Without urgent action on pensions, old age will be something to fear
by Dr. Ros Altmann
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The credit crunch has dramatically worsened our pensions crisis, so one might have hoped that this year’s Budget would contain some measures to help pensions and pension funds. Not a bit of it! In fact, it contained yet another stab in the back for a pension system that is already on its knees.
Alistair Darling said the Government is committed to ‘encouraging and rewarding saving, and enabling people to meet their income aspirations in retirement’. But he then proceeded to announce measures to damage top earners’ pensions, while doing nothing to help other people’s pensions at all.
The Chancellor declared his policies were guided by ‘principles of fairness and opportunity’. He said it was unfair that one quarter of the £30billion spent on tax incentives for pension savings should go to the wealthiest 1½ %, so he had decided to do something about this. His answer, however, was just to spend less on incentivising pensions by taking away top rate tax relief from the contributions of anyone earning over £150,000.
This is nothing to do with fairness. It’s all about raising revenue in an economy racked by reckless public and private sector borrowing. If it was about fairness, he would have used the money saved from tax relief to improve other people’s pensions. Of course he didn’t.
But the measure was certainly guided by ‘opportunity’. He saw the opportunity to raise money from future pensions and he took it.
This is just another in a long line of measures – starting with the 1997 dividend tax raid – which have consistently and continuously undermined pensions. In our rapidly ageing society, this is seriously bad news.
Instead of encouraging people to save while the economy was doing well, Government policy encouraged the public to spend and borrow as if there was no tomorrow. But there is a tomorrow. And for those approaching retirement, it is looking distinctly bleak.
How are future retirees going to achieve any measure of security in old age? Until about 10 years ago, we had one of the best retirement savings cultures in the world. The UK had more money in private pensions than the rest of Europe put together.
In fact, the UK state pension is so disgracefully low that it is essential to have other income for any chance of a decent retirement. Government was relying on employers and individuals to have good private pensions to supplement their meagre state payments.
But almost all our generous traditional private sector final salary schemes are now closed. They have been hit by Government-imposed regulatory and tax burdens, as well as poor investment returns and longer life expectancy. As employers cut back, the costs and risks of pension provision are falling on inadequately-prepared individuals , many of whom are heading for an impoverished old age. This is a recipe for long-term economic decline.
The Government’s most recent pension reforms amount to little more than rearranging the deckchairs on the Titanic as our holed pension system sinks.
We cannot keep going as we are. Radical rethinking of both pensions and retirement is long overdue.
Firstly we must reform the state pension. It is currently so inadequate that almost half of all pensioners need to apply for means-tested benefits. This penalises their private pension savings. As long as the state pension undermines private pensions in this way, pensions cannot thrive. In fact, the money saved by abolishing top rate tax relief on high earners’ pensions could be used to provide a decent pension – perhaps £150 a week – to every citizen over age 75. Not only would this be simple and fair, it would also mean the Government would no longer need to force everyone to buy an annuity. Then removing the national insurance rebates from public sector workers’ pensions could fund significant extra incentives for private sector savings.
We must start to restore our once-strong savings ethic. Over the past decade, Government policy has transformed a culture of self-reliance and thrift into one of debt and dependency. Our financial regulator (the Financial Services Authority – FSA) has operated asymmetrically – encouraging borrowing while discouraging saving. Under the FSA regime since 2000, it has been incredibly easy to obtain a £200,000 loan that the borrower could never afford to repay – self-certification, no risk warnings, no checks. But to put £20 a month into a pension, requires reams of forms, risk disclosures and compliance checks. Hardly a wonder, then, that UK savings have plummeted.
Of course, part of the answer also lies in encouraging people to understand the benefits of working longer – but preferably part-time, not full-time. Retirement should be a journey, rather than a destination, and then pensions would be more of a supplement to earnings, rather than a total replacement.
Unfortunately, however, policymakers have remained in denial about the pensions crisis. Of course, this could partly reflect the fact that it does not affect them directly. Politicians – and their civil service advisers – have fully protected, recession-proof public sector pensions, courtesy of taxpayers whose own retirement plans lie in ruins. Now if we are talking about fairness and pensions…