The IFS report on pensions just underlines how ridiculously complex what should be a simple system of saving for old age has become. The glossary of pension terms published by the Institute of Actuaries,(recommended for insomniacs) has about 120 entries ( I think – I couldn’t be bothered to count them all) Good luck (if you are not an actuary!)
Most people haven’t a clue about pensions
Very few people understand how to calculate the result certain levels contributions plus assumed compound returns would give over a defined period, and, anyway, 25% of the population cannot calculate a percentage. Doctors get upset when they get a big tax bill they don’t understand. University lecturers strike when asked to pay a bit more. I assume doctors are more expert at looking after our health than doing the actuarial calculation of what their theoretical tax deductible contribution should be to ensure that their theoretical future pot must stay within the LTA . The LTA but the way – £1,073,100 – would buy a joint life annuity with some inflation protection well below the national average wage at age 55 (apparently most people’s dream age for retirement). They will have to wait another 11 years for the state pension to cut in to bring total pension income up to the national average wage. But contributions to workplace pensions are so low that they will not provide a pot of anything like the LTA even at age 66 Also the lifetime cap includes investment returns thus penalising successful investment strategy. Owners of small businesses are not allowed to make tax deductible contributions from dividends that all sensible owners use to cope with variable revenues and the self-employed who also live with variable incomes are similarly penalised. Why can’t we pitch in a lump sum from inheritance, since many will receive it as the first generation of homeowners in significant numbers dies, instead of using it to move to a more expensive house which seems to be fueling the house price boom? And so on and so on.
Radical change is needed
The system needs a complete reboot. But the real barrier is tax deductibility. The estimated £40 billion annual cost of tax and associated NI reliefs is mainly a benefit to higher rate taxpayers. Reduction or abolition of these reliefs would be controversial since it would not only impact the higher paid but also increase employer pension costs in the public sector, which includes the only significant numbers with DB pensions . But please, please, no further tinkering. That will only make the system even more complex and irrational (and further lengthen the actuarial glossary).
So there is one easy solution. Plan to scrap the old system entirely and make it TEE rather than EET, just like an ISA. Aim progressively to scrap or significantly reduce up-front tax relief, make the whole system DC, remove all caps, disallow employer contributions and allow any individual to put in as much or as little as they wished whenever they wished. This would take a few years to work through but would result in a much better and fairer system. Look at Australia, which is generally regarded as having the most progressive pension system in the world not unlike what I am suggesting.
All about investment funds 