Policy Exchange attacks pensions with "Help to Save"

jamesd

The conservative Policy Exchange think tank today made a range of proposals that undermine pension investing:

1. Mandatory purchase of an annuity with half of a pension pot's value.
2. With the remainder, mandatory purchase of one of an approved range of funds that prohibits capital drawing, so you're forced to die with a huge amount of money left instead of being able to use it to improve your life while alive.

To force people to contribute to this system it proposes:

3. Mandatory work pension contributions with no opt out unless a person has enough to buy an annuity that would provide their minimum income requirement of £16,200 a year.
4. Mandatory increased amounts.

They call this abomination "Help to Save" rather than the more honest "Force you to invest in the way we want you to".

Net effect for me would be easy: I'd cease all but mandatory and employer matched pension contributions and try to withdraw all existing pension money as fast as I possibly could. And switch my retirement income planning to less restricted options.

The high minimum income in retirement of at least £16,200 is a bad joke.

atush

Do they not want to be in elected office? This plan would be suicide.

dunstonh

The left and right think tanks seem to take it in turns to come up with speculative ideas to court media attention.

The removal of opt out has been suggested a number of times and was a recommendation in the original report (as in making it compulsory). it will quite possibly come in years to follow 2018 when all companies have to comply with auto enrollment.

TrickyDicky101

The moment enrolment becomes compulsory I suspect - if it hasn't happened by then already - is the moment that higher rate relief on those contributions will cease.

I sincerely hope that no political party would adopt such proposals - I think they would get punished at the polls so is not really a politically viable proposition for anyone at the moment.

I think the nature of retirement will likely have to change so that part time working rather than full retirement is an accepted outcome. You will get people decrying this as "taking jobs from the young" but these are scaremongering arguments from people without basic understanding of economics.

kidmugsy

In what sense is it "Conservative"?

Its own description is:
Policy Exchange is an independent, non-partisan educational charity seeking free market and localist solutions to public policy questions.
Charity Registration Number: 1096300

Freecall

The government should issue annuity type government bonds

Collecting money through NI is one thing but can you imagine the way some sections of the press would present this as people being forced to hand over their life savings to the government.

I can't see any of the main parties buying into this.

jamesd

kidmugsy wrote: »

In what sense is it "Conservative"?

'Policy Exchange is a British conservative think tank ... The New Statesman named it as David Cameron's "favourite think tank", a view shared by the Political Editor of the Evening Standard Joe Murphy, who referred to it as "the intellectual boot camp of the Tory modernisers’". Its alumni include Anthony Browne, one of London Mayor Boris Johnson’s policy directors, and a number of the Conservative 2010 intake of MPs, including Nick Boles, Jesse Norman, Chris Skidmore and Charlotte Leslie ... Policy Exchange was set up in 2002 by a group including Nicholas Boles (director), Michael Gove (chairman) and Francis Maude. Maude went on to become Minister for the Cabinet Office, and names being one of the co-founders as his proudest political achievement. Gove went on to become Secretary of State for Education'.

If you don't want to believe that because of the source, read the references directly.

jamesd

Well, here's a bit that helps to explain some of their scare story numbers: "Using an 8% contribution ratio, a 3% real return and a 40 year contribution period". So instead of using the historic FTSE return of around 5% they throw away 40% of that. The effect of that massive reduction in returns on the pension pot size:

3%: £92,606.
5%: £152,602
5% for 50 years: £266,865

So they neatly chopped 40% off the pension pot value with their growth assumption. Which is quite interesting because: "using the 8% contribution rate, their pension pot was likely to be only around 55% of what they need to generate the target retirement income. "

Which promptly means that their whole report vanishes in a puff of hot air because historic returns pretty much match their target and the whole issue they are on about vanishes.

Then they went on to use an annuity rate of 3.6%. Which implies an inflation-linked annuity. Someone really should explain to them that the inflation-linked annuity market is so badly uncompetitive and such poor value for money that the rational choice is to buy a level annuity and invest the initial income difference. Add in any halfway decent allowance for that and what's actually happening already is sufficient to exceed their target income levels.

They didn't use a full working life, just the years from age 18 to 58, not to state pension age. So their proposal is to force someone who has a full working life to accumulate a pension pot 75% higher than the one they say is needed. Assuming they use 60% replacement income as the target, that could make retiring produce a higher income than while working, depending on how much income comes from the pension pot vs the state pension. Without allowing for the poor annuity choice.

Not sure what the people involved know about pensions but this sort of thing is very unimpressive.

kidmugsy

jamesd wrote: »

'Policy Exchange is a British conservative think tank ... .

But you didn't say it was "conservative" you said it was "Conservative". Shame on you.

jamesd

That's why I included the names of some involved, to illustrate that it's Conservative, not solely conservative. It's not an official Conservative Party think tank, though.

kidmugsy

jamesd wrote: »

. It's not an official Conservative Party think tank, though.

At last! But I'd have expected your apology to be more gracious.