Give us all a high five on pensions, Mr Sunak

We’ve got five ideas to help boost and simplify savings

THERE was speculation in the lead-up to the cancelled Autumn Budget Chancellor Rishi Sunak would struggle to resist the temptation to tamper with the pensions system – in an bid to plug the financial black hole Covid has plunged us into.

How on earth as a country will we repay a debt which, according to the respected Institute for Fiscal Studies, will spike at £372billion in cash terms?

This would mean the Government borrowing 33p of every £1 it spends, compared to a peak of 22p in 2009-10 when the full impact of the credit crunch and resulting crisis hit home.

But should attacking our pensions ever be the way to go about it? And what can be done to help make our pension system the envy of the world?

Andrew Tully, technical director at pension giant Canada Life, says: “As a nation, there can be no doubt we will all share the burden when it comes to helping pay off the financial hangover from the pandemic.

“But using our pension system will undoubtedly introduce yet more rules and regulations which will only serve to confuse and put people off saving for their retirements.”

Over the years, there has been much tinkering with the pensions system with the apparent aim of simplifying something that is hugely complex and confusing. But many of these changes have added to that confusion.

Major changes to pension rules happened in 2006 when a two-tier system was introduced, and then in 2015 when so-called pension freedoms were launched which bamboozled many savers and left them unsure about what to do when they got their savings pot.

Then there was the introduction of the “flat-rate” state pension in 2016, which has proved to be anything but a flat rate and the equalisation of men and women’s state pension ages, which is currently at 66 but will rise further, leaving many younger people wondering if they will have any chance of a state pension.

It is unfortunate that though a pension is still the best way to save for your old age – a message I repeat on these pages again and again – our current system is almost impenetrable and hard to understand for the majority of savers.

It should be straightforward. You pay your National Insurance contributions over years of graft to entitle you to a state pension at an agreed age.

And to boost that and give you a more comfortable retirement, you put a bit away out of your earnings to create an income for your older age when you give up the nine to five grind.

We need a system we understand, so we can plan for our retirement and ensure we have the best chance of having enough cash to live off and not have to scrimp and scrape.

But the constant tinkering keeps putting a stop to that.

So, just how can we make the pension system better for all? How can we make it easier to navigate and encourage more people to save, which will only reduce the burden on the state in the future?

With the help of Canada Life, I’ve come up with a simple five-point plan for Chancellor Sunak to consider when thinking about his Budget in spring.

1 Age

Reduce the age for people to be auto-enrolled into their pension through the workplace from 22 to 18. There is no better way to get into the savings habit than when you first start your working life.

Since many of us start our careers at 18, why not start paying into a pension with money also provided by our bosses? If we start paying pension contributions as soon as we start working, we won’t miss the money when it’s taken from our pay packet.

It will be just one of those deductions that comes off our pay and we will learn to live off the net balance from the very start of our working life.

Those extra four years, saving a total of £8000 if you pay in 8 per cent as an average earner – can make a big difference due to th financial miracle of interes compounding, which means cas saved in those early years of wor earns interest upon interest, an helps to build up a decent-size po over a working lifetime.

2 Contributions

Sort out the problem o minimum contributions for low earners. Currently, to be include in a company pension scheme yo have to earn £10,000 a year or mor

This is called the earning threshold. If you have multiple job all working part-time for you employer, and for each job you earnings each year don’t exceed th threshold, you won’t be enrolle into a company pension.

This means you’re missing out o employer contributions

effectively free money – and the chance to build up a pension pot.

3 Pay

Resolve the net pay issue. Confusingly, there are two methods for getting the valuable tax relief which you are due on your pension contributions.

Relief at source arrangement is where your employer can choose to deduct your pension from your net pay. Your employer deducts tax, then deducts 80 per cent of your pension contribution.

The government automatically adds the 20 per cent tax relief into your pension. This means those who don’t pay tax still get tax relief on their contributions, worth up to £3600 a year.

Or, your employer can choose the net pay arrangement where they deduct your full pension contribution from your gross pay, which means you pay tax on lower earnings and therefore your tax bill is lower.

But this method means no tax relief is given to low earners. That’s unfair and needs sorting.

4 Self employed

Introduce some form of autoenrolment for the self-employed. Huge numbers of self-employed people across the UK economy don’t benefit from the pensions system as they don’t participate and don’t receive the benefit of employer contributions.

Recent Institute for Fiscal Studies research, partly funded by Canada Life, shows there has been a decline in the proportion of self-employed expecting to receive any income from a private pension.

Giving the self-employed greater incentives to save into a pension, or allowing them to access their funds in certain circumstances to help their business, would be a step in the right direction.

5 Amounts

Remove the needless restrictions around how much you can save into a pension annually.

There are two limits here – the first is called the Annual Allowance and restricts your saving into a pension to £ 40,000, or the maximum of your annual earnings, each year.

The second is the Money Purchase Annual Allowance, which is triggered if you flexibly access your pension from age 55. This restricts any subsequent saving that you do into a pension to £4000 a year – so pension wealth cannot be recycled back into another pension and attract more tax breaks.

Both of these numbers may sound like a lot of money, but if you are self- employed or have significantly changing earnings patterns year on year, you might want to pay more into your pension in a particularly good year but find you are unable to do so.

Andrew Tully adds: “These issues may all seem like complex things to solve, and nothing is simple in pensions these days.

“But making some positive changes will get more people engaging and saving for their futures which can only be a positive thing for both themselves and the UK economy.”