Pension Crisis: Are you prepared?
20/07/2010
by Rebecca Sargent
As longevity increases and the cost of living soars, it has never been more important to save for retirement, yet the amount saved into private pensions is falling – the total contributions to private (non-state) pension schemes fell at the start of the recession, from £86 billion in 2007 to £82 billion in 2008 .
The recent Conservative-Liberal Democrat coalition recognises these shortcomings, but seems to be tackling the more pressing issue of income for those at or nearing retirement first. The eight week consultation into the compulsory annuity age was launched last week, which should give those nearing retirement more options and control over their income.
The coalition Government also plans to scrap the default retirement age and ‘triple-lock’ the basic state pension – raising it by the higher of earnings, prices or 2.5 per cent. But industry experts are hoping for more action. A new research paper from the Centre of Policy Studies puts forward some interesting propositions that address the need for greater individual pension savings.
The paper, titled ‘Stimulating and Unlocking Long-Term Saving’, recognises the fact that pensions are not a particularly popular savings vehicle. Author Michael Johnson, former economic adviser to the Conservative Party claims that large sections of the public are disillusioned with the idea of pension saving, a theory which is backed up by the fact that in 2008 £35.7billion was invested into ISAs, while £24.9billion went into pensions from employees and individuals in the same year.
It seems that, while personal pensions, including SIPPs, offer tax relief on contributions, people find the humble ISA (Individual Savings Account) a more attractive savings option.
Whether this is due to the fact that pension investments are locked away, or because people find them confusing and unsustainable remains to be seen, but Johnson is calling for a harmonised tax system for both pensions and ISAs, concentrating on the ISA option, which offers no upfront tax relief.
Johnson believes that ISAs should be included in employee auto-enrolment legislation, that limited access to funds pre-retirement should be allowed, and that annuities purchased with ISA funds should be tax-free.
Whether Johnson’s suggestions will be heard or not, one thing is clear, and that is the fact that we are responsible for our income in retirement, and we need to start saving somehow. Whether this is in the form of a tax efficient ISA, personal pension that offers tax relief, or a standard saving account or investment, this is an area that needs to be addressed.
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