How can pensions be made to work?

EdInvestor

http://business.scotsman.com/index.cfm?id=558832005

Link to the article.

To my mind what people could do with is some simple information about how to invest the pension contributions.Far too many people's money is stuffed in underperforming old With-profits funds or Balanced managed funds.These were all very well in the inflationary old days of double digit returns but they won't work now.

However most people have no idea how to go about investing in good funds and there's very little help available.You can see this because of the number of queries that pop up regularly on BBs asking for help on which of the (usually either bafflingly large or far too small) array of funds to choose.

Milarky

Maybe the problem isn't so much with the methods being considered as with the egos involved. In today's Guardian Politics it's plain that those in government would rather jockey for advantage than address these problems in a mature fashion - shame!

This does not bode well for Turner's final proposals [which were commissioned by the Treasury, so qualify as 'Brownite'] when the government gets them in November.

EdInvestor

A useful tip from the Mail:

New rules coming in from next April that improve the pension savings limits for most people mean they can save tax-efficiently with an Isa and then move money into a pension as they get nearer retirement. This is a good idea for those whose income attracts basic-rate tax now, and, therefore, only basic rate tax relief on contributions.
As they get older, earn more and enter a higher tax bracket, they can invest this money in a pension and gain top-rate tax relief.

Then, when they retire, they will probably be back to paying basic rate tax when the pension pays an income, because the pension will be lower than the salary and because of higher age allowances. So a win-win situation.

Just make sure you don't cash in and spend that ISA

That would be a lose-lose situation, as not only would you have no pension, you would lose the tax free protection from the ISA.:(

So it's an idea for grown-ups.

dunstonh

Couple of downfalls with that Mail tip:

1 - What if tax relief on pension contributions is removed?
2 - Invest now and you get growth on the tax relief for x number of years instead of the last few. So doing it that way will give a lower final value.
3 - You may reduce your childrens/working tax credit entitlement by not using pensions ISAs do not count.

Certainly useful for those that don't want to put everything into one tax wrapper but the negatives should be pointed out too. This is fairly typical of the Mail though. Only point out some of the story and not all of it. Remember the Mail printed performance league tables in the past which had corporate bond funds and techonology funds together and highlighted the better performance of tech funds. I wonder how many pensioners read that and lost thousands which they would still have now if they had left their money in the corporate bonds.

Pal

Easy ways to improve pensions and boost people's savings for retirement:

- Scrap the basic state pension and S2P/SERPS. Replace them with "job seekers allowance" or "unemployment benefit" for those people who have stopped working (whether age related or not);

- Make pension contributions to all pension arrangements NI exempt;

- Scrap the tax free cash sum options on pension schemes;

- Give all over 65's a tax free earnings allowance of £20k a year before they start paying basic rate tax.

Easy, init?

EdInvestor

Very radical Pal :T

I'd love to see a costing of getting both the tax and the tax relief out of the whole savings and retirement equation.

As far as I can see the current tax ystem delivers help to people that don't need it and penalises those who do, distorts investment decisions, encourages excessive profiteering by financial service companies and wastes money by being expensive to administer. Perhaps we should just get rid of it as you say.

Pal

My main point is that there has to be a very real and obvious tax incentive for people to save, otherwise people just don't bother. So simply replace tax deferral with a real tax saving. You could even make it even more attractive by INCREASING inheritence tax (to say 50% with no tax free allowance) but providing relief if the money inherited is put into a pension vehicle.

Most people inherit something at some point in their life. Give them an incentive to save it for their own retirement.

You can then make a 10 year pension guarantee the absolute minimum - that gets round the argument that many people die before getting their moneys worth from a pension.
The main thing distorting the pensions market are the state pensions. Getting rid of them, even if you end up paying the same amount of money in unemployment benefit, will incentivise a great deal of people to save for their own old age.

EdInvestor

Pal wrote:

My main point is that there has to be a very real and obvious tax incentive for people to save, otherwise people just don't bother.

Not sure that's really the case.You mean don't save in the "pension format"?But they do save in other ways.

It's true that people believe the basics are taken care of via the state pensions, and they almost are.

People's priority is saving for a deposit for a house - and that's as it should be, because a house can act as an extra pension fund as well as somewhere to live.

Accumulating a cash emergency fund and then paying off the mortgage early are other good ways to save.

Unless "free money" is coming your way from an employer, it's hard to see pension saving as a priority for young people, especially as returns are now so uncertain and annuity rates are so low.

Having said that if there was genuine tax relief on the whole of a fund it would be significantly more attractive, but guess who would make the gains - the higher rate taxpayers who don't need the help!

Milarky

Pal's approach seems to be to be a 'carrot' and 'stick' one - taking the 'contributory' pension away and making it much more discretionary - whilst beefing up the reutrns to saving by including NI in the tax relief given[an extra 10% which coincidentally is what the Conservatives were recommending before the election]. A ten years payout guarantee would do no harm to the prospects of pensions if they remained voluntary but I am concerned how serious he about scrapping a 'as of right' state pension?

Would it not be better to bolster the flat rate pension - the general consensus outside the government - which could be justified by higher taxes to pay for it? Of course this only works if the govt can be believed when they promise to pay future pensions at higher rates in exchange for higher NICs [tax] today.

The alternative approach to entrusting this duty to the state is to take it away and encourage contracting out. The Tories favour this route, despite its poor press. The theory has not been spectacularly successful howerver!

So we could:

- Scrap the state pension/S2P

- Boost the state pension/S2P

- Do nothing with the state pensions and just try to bolster pensions elsewhere.

The easiest of these options is to try to bolster non-state savings without detracting from the state pensions - whilst trying to address the less workable aspects of state pensions themselves [e.g. phasing out S2P whilst raising the flat rate pension AND making qualification for the flat rate pension more equitable than it is today]

EdInvestor

Why do you want to phase out S2P?

Boosting the basic state penson just gives more money to people who don't need it.The whole pension system is designed to deliver tax perks to the well off already, why make it worse?