Time to make pensions fit for everyone
AUTO-ENROLMENT has been one of the few measures introduced by government over the past 20 years to improve the pensions landscape. While reductions in lifetime and annual allowances – and the ostracising of additional rate taxpayers – have all damaged the pension savings habit, autoenrolment has stimulated it.
As a result, nearly nine million workers are now saving for the first time into a work based pension, building wealth for a future when they can work no more. Wealth being funded by a mix of contributions from the Government (by way of tax relief), employer and employee.
Yet, auto-enrolment, for all the plaudits it has received, remains unfinished business. This week we should learn whether the Government acknowledges this when it publishes its recommendations for reform of this policy initiative.
The review could go either of two ways. Distracted by Brexit issues, the Government may argue with some justification that auto-enrolment should stay as it is. It is a regime that prompts people to save for the long term while not overburdening businesses with costs they can ill afford, especially at a time of economic uncertainty. Alternatively, the Government could be bold and build on the policy success.
What could it do? For a start, the Government should honour its manifesto commitment to include the self-employed within autoenrolment.
It should also extend the regime to automatically encompass low earners (with annual salaries below £10,000) and do away with age limits which mean those aged under 22 or above state pension age are excluded unless they specifically demand to be opted in.
According to the Association of Consulting Actuaries (a trade body for pension gurus), some 12 million workers are expected to be excluded from auto-enrolment if the rules stay as they are. These people are likely to face a retirement reliant on state pension and benefits. I would also like the contribution system to be less restrictive. Currently, only a slice of annual earnings (between £5,876 and £45,000) is used to determine the amount of contribution that ends up in someone’s works pension fund. At the very least, the upper band should be scrapped.
One other welcome change would be the right for workers to determine which pension provider manages their contributions. Currently, the employer decides.
As for pension contributions, they will rise to a minimum eight per cent from April 2019 – when all businesses big and small will have embraced auto-enrolment. But any half decent consulting actuary will tell you that eight per cent will not secure you a financially stress-free retirement. The contribution should be in the region of 15 per cent.
I doubt whether the Government will have the guts to make such a recommendation. It will no doubt save that one for another day – or a Labour Government. If so, it will be a crying shame. As things stand, and for all the goodness that autoenrolment has brought to the table, the savings habit in this country remains woefully undernourished – a statement given credence by new research from Fairstone, one of the country’s largest chartered financial planning companies.
The results are frightening. According to Fairstone, more than half of adults (52 per cent) have no retirement plans in place whatsoever. Of those that do, few (48 per cent) have cast an eye over their progress in the past year. When a similar survey was conducted seven years ago, the respective figures were 37 per cent and 53 per cent. In other words, things have got worse.
As things stand, the savings habit in this country remains woefully undernourished
IT STICKS in my craw that everything Royal Bank of Scotland does to return itself to profitability is at the expense of loyal customers. The bank currently pays some of the worst savings rates in the market. Now, controversially, it has decided to axe 259 branches – one in four of its network.
Although it justifies the cull on declining usage grounds, this is not the only reason. Cost savings are being made to atone for the bank’s appalling behaviour in the run-up to the 2008 financial crisis.
To remind you, this is a bank which we as taxpayers have a 72 per cent interest in. Surely the Government, as our representative, should be putting more pressure on its management to mould RBS into a bank that puts customers first and delivers a level of service par excellence.