The statistics suggest that the number of people in pension schemes is at an all-time low and whilst the process of auto enrolment is now celebrating a cautiously optimistic first birthday the next two or three years look like they will be much more challenging.
At the same time, we are all living longer and patterns of work are changing. Again, the ONS shows that in 1981 there were 2,420 people aged over 100 in England and Wales but by 2012 this figure had soared to 12,320, a fivefold increase. Add this to the ONS figure from a few weeks ago that stated over one million people (10%) are now over the age of 65 and are still in active employment.
We are living longer, patterns of work are changing and for many retirement aspirations are high.
The baby boomer generation is nearly at its peak and the over 50s are now seen as a real economic power.
Currently we are in the party political conference season but what have we learnt about pensions?
Well, society is providing incentives for people to save into pensions and arguably it does not seem to be working. So should we be spending such an amount, bearing in mind that those that do take advantage tend to be the better off?
A difficult conundrum – relying on the State will not produce the standard of living that most people would like but will people save without incentives? Is pension tax-relief an incentive or just a way of ensuring that tax is only paid once on income i.e. an income tax deferral mechanism? Historically the latter statement was the main argument as there were no restrictions on contributing and we spoke about our pension system as being EET (tax exempt on contributions, tax exempt on investment growth and income taxed on the way out).
With the introduction of the Annual Allowance and the Lifetime Allowance the argument that the system is a tax deferral system is weakened as it is only tax deferral up to a certain limit and instead I think we now see the tax advantages available as being incentives to save.
So what happens if you take away or erode the incentives – will people save voluntarily?
I am sure some will but others will not see the value of deferring consumption unless there is a benefit of doing so.
This whole discussion contributes to that feeling of continual tinkering to the system creating a totally confusing pension system with no one knowing what they will actually get at the end.
Politics in the UK is short term with one party spending the money and hoping they might not have to recoup the deficit.
Surely there are some bigger questions to be answered. Yes there is an immediate cost of pension incentives but there will also be a cost to provide people with welfare benefits in the future. Can we just stop and think about the balance between the cost today, tax paid by the wealthier pensioners and the state benefit needed to bring those without pensions to a minimum level please…. and do not get me started on the tax free lump sum!
Mike Morrison
Head of Platform Marketing
AJ Bell