Pension schemes should be made compulsory and the £1.25m cap needs to be scrapped, according to a panel of leading financial experts, who are sick and tired with the health-hearted reforms made in recent years.
In last week’s election-themed article on financial education, Steel Asset Management’s Alan Steel pointed out that 10 state changes were made to pensions between 1961 and March 1987, while between March 1987 and the end of 1999 74 changes were made.
Shockingly, between 2000 and April 2006 – in the run-up to ‘pension simplification’ – 350 changes were made, and since its implementation there have been 176 changes.
“You can see what’s going on. Successive governments are coming in and changing things and so we have a population who are at a complete loss,” he said.
“I happen to be a pre ‘87 member of a pension scheme. That’s really important because, pre-’87, there were no caps. And we were promised there would never be any future legislation that would remove our benefits.”
“In 2006, Gordon Brown decided to actually remake on that promise. If you keep remaking promises as successive governments do, you end up with a number of people who say, “I’m disappointed with this because I don’t know how tomorrow is going to be”, so the first thing I would do is I would scrap all that legislation.”
“I don’t see what’s wrong with people building a big pension fund because they happen to be good investors.”
To add insult to injury, Steel says people exempt from the cap include the prime minister, the chancellor, the reader in the House of Lords and the reader in the House of Commons.
“The first thing I would do is make a promise that this will never happen again,” he said.
“I would also make a promise that the 25 per cent tax-free cash sum will not ever be attacked. There are rumours of it being attacked and they have been getting more concerning throughout my lifetime.”
“Stop tinkering, scrap all that legislation and just say to people “put your money in here. We promise that will never change”, I think that would be a good start.”
Darius McDermott (pictured), managing director at Chelsea Financial Services, believes that an incentive to save for retirement is more important than ever, and that changing legislation and breaking promises is going to achieve quite the opposite.
“If we want people to save, if we accept there is an absolute requirement to save we’ve got to save more, we’ve got to save for longer, and I think Alan’s point couldn’t be better made,” he said.
“You’ve got to have some certainty as part of your contract for delivering more of your own savings to take the burden away from the state.”
“There’s got to be some certainty that a future government won’t just whip it away from you because, if we’re trying to persuade people to save for a much longer retirement, then there needs to be a fair side of the deal. That’s why I’m surprised it was a Tory chancellor who capped pensions – it shows there’s a more centre-movement in politics generally.”
McDermott believes that, regardless of political persuasion, people need simple rules to follow and an attainable goal to aim for.
He said: “I think auto enrolment is a nice step in the right direction, but what we need realistically is compulsion. I think there’s very low evidence of people actually un-enrolling so far.”
“Let’s just stop messing around and let’s tell people they have to contribute to a pension if they work.”
Steven Andrew (pictured), manager of the M&G Episode Income fund, agrees that putting money into a pension scheme as a matter of course is the ideal outcome.
He warns that the combination of the baby boom in the 1960s and advancing healthcare technology will place even more of a burden on savers in light of longer life expectancy.
“In terms of healthcare, it’s not true that if you live to an old age it’s only in a deteriorated and dilapidated state health-wise – statistically, it’s only in the very final year of one’s life that the healthcare bill really shoots up,” he pointed out.
“Up until then it’s a healthy life as it would have been five years ago, ten years ago, fifteen years ago, so we’re all living longer, healthier lives.”
While the baby boom technically occurred from 1946 through to 1965, Andrew’s research shows that more babies were born in 1964 in the developed world than in any year before, or in any year since.
“This means that, right up until 2029, we have a growing army of 65 year olds. A fresh, growing army of 65 year olds entering into this decision-making process.”
“Why did we choose 65 for goodness sake? That in itself is archaic. That in itself says that you’re no longer of use to society and this economy which is utter nonsense.”
“It’s about a broadening of our appreciation of what being 65 and older means, both from a “where do I now get labour income?” sense, and more importantly, from my perspective, “where do I get my non-labour income from?””
In order to fund a much longer retirement, however, more money needs to be saved. To do this, the panel agree that people need to begin investing in pensions at a much younger age.
Steel said: “The US found that the average amount of savings that 55 to 64 year olds have is four times their net income, whereas, as Steven pointed out, you’ll need far more than that with the way the population is aging.”
“I think you need to have a fund of 25 times the net income you want to have at retirement as an absolute minimum, and right now, that’s going to be more than the £1.25m cap.”
“The fact of the matter is, people sadly don’t realise what they have to do to raise a decent amount of money by retirement. If you get to retirement with 20 or 30 grand, you’re just deluding yourself.”
Steel admits that getting young people to begin saving sooner rather than later is a challenging task, in spite of the large pension-longevity gap and the worrying figures.
“I’m an optimist and a contrarian by nature, but I’m also quite cynical – I just think it’s so difficult,” he said.
“We can sit here and talk about this. I can see a lot of youngsters listening to this and thinking, “but it’s not for me, I’ve got a student loan”. It’s extremely tough.”
“In my experience, people don’t start to realise that this is an issue until they get to about 45. It’s at that point they really start to care and I don’t know how to do it, but we’ve got to bring this idea of confidence.”
McDermott thinks that the way to get younger generations to begin investing in their future is to make compulsion, from a national point of view, become a cultural fact of life that is taught and accepted.
“I accept the counter-arguments about tax cuts, wage cuts, “I’ve got to pay my student debt”, “I’ve got to pay my mortgage”.”
“In which case, you should learn at school that some of your money will go to your pension. I mean, it happens anyway through national insurance, but not a national insurance pension that’s going to allow you to retire, if you’re born today, probably before you’re 90 I would guess.”
“The average age is going to be 120 – you can’t just work for 20 years and retire for 40, it just doesn’t work.”
“I do welcome the pension freedoms, but they’re not just going to come with lots of good outcomes, there will be bad outcomes as well.”
“But, what we really need is pension compulsion as an attempt to beat the massive longevity pension gap.”