Pensions are far too inflexible for today

John Fox

John Fox

Q. What’s the main problem with pensions? A. Pensions.

It sounds absurd but the problem with pensions continues to be, well, pensions.

Ask anyone in the street their views about pensions and the response, 99 times out of 100, will be something along the lines of: they’re too complex, I don’t understand them.

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This, of course, is saying nothing new. Neither is the fact that there isn’t a huge amount of trust in the pensions industry.

Over the years, there have been simply too many negative headlines of people who have saved all their lives only to lose the lot just as they hit retirement.

But beyond the core issues of trust and over-complexity, pensions put people off in a whole host of other ways.

One is their finality, their total inflexibility. For a large percentage of people, the black and white nature of pensions is a major deterrent.

The idea that the money they are squirreling away for the future through a pension can’t ever be accessed (at least, without a punitive tax charge) makes people feel vulnerable.

It makes people feel especially vulnerable when they’re in a tough economy, like the one we’ve been in for the past five to six years, and when there are countless other areas competing for our spend.

Another reason why pensions put people off is that they’re skewed unfairly in favour of the higher-rate taxpayer.

I’m convinced that the government should rethink the tax relief system in a way that encourages lower-rate tax payers to save more without alienating those people who are lucky enough to pay tax at 40 per cent.

How about a flat rate for all pension savers of 30 to 35 per cent? I think this would be a real incentive for lower-rate taxpayers while not discouraging pension savers in the higher tax bracket.

Ultimately, if the government wants to get people to save seriously for their retirements then it needs to start a positive debate about alternative structures that address some of the issues above.

Dare I say it, there needs to be some vision and thinking outside the box.

The Canadian pension system, for example, is much more practical and tuned into people’s everyday lives. The Registered Retirement Saving Plan system provides options that remove the sense of finality (and also banality) surrounding pensions.

Members of RRSP schemes, for instance, can take a tax-free loan of $25,000 from their funds to help towards the purchase of their home. They are also able to use some of their accruing pension pot to help fund post-secondary education for themselves.

While I’m not saying these options are game changers, they’re certainly a world apart from what we are used to here in the UK – and, given their flexibility, would surely get more people to save.