There is no escaping the fact – we are sleepwalking into a massive problem.
George Osborne spoke in yesterday’s budget speech of balancing the books. Of not spending beyond our means. But what about saving for retirement? He admitted we weren’t saving enough. And launched a Green Paper (“Strengthening the incentive to save: a consultation on pensions tax relief”) about how the tax system can be modified to incentivise people to save more.
I’m not an actuary, but that doesn’t mean to say I don’t like numbers:
- The cost of tax (and National Insurance) relief to the treasury = £45 billion per annum
- The average lifespan of a 65 year old in 1982 = 15 years
- The expected average lifespan of a 65 year old in 2062 = 25 years
- The percentage of workers with a workplace pension in 1997 = 65%
- The percentage of workers with a workplace pension in 2012 = 55%
What broad conclusions can be drawn from these numbers? Firstly, that tax relief on pensions costs the treasury a massive amount. Secondly, that the amount we need to save for retirement to maintain the same retirement date and standard of living is massively increasing. And finally that the amount we are saving in pensions is decreasing.
Previous generations had generous defined benefit pension schemes. They could retire at 60 and enjoy two-thirds of their salary with generous increases. A rough guide of the cost of such schemes might have been 20% to 25% of salary. It wouldn’t be unusual for contributions going into a defined contribution vehicle to be far less than half that amount. And with increasing longevity that means that people will simply not have enough to live on in old age.
My grey hair count indicates that there is a generation beneath me of working age. I spoke to some of them yesterday about their pension provision. The conversation was enlightening. Some have opted out. Why?
- Because they believe retirement is such a distant prospect that they have greater priorities now (getting on the housing ladder being one of them)
- Because they’ve lost trust in the financial system. The word “banker” in their eyes might as well be “fraudster”, and the word “pensions” is a yawn-inducing turn-off
- The Government keep changing the Rules. Hence they have no confidence as to when they will see their “locked-up” money.
- They are from an instant gratification generation. They don’t wait for post any more – they get emails. The garage they bought their cars from was more interested in selling them the finance than the car itself.
The Government is intent on balancing the books by reducing the immediate state spend. And there is £45 billion of tax revenue being deferred, some of which will never be realised due to the disparity of tax positions pre and post retirement, which is not delivering the outcome for which it was intended. So, just like Gordon Brown’s 1997 pensions raid, surely this is an easy political decision. Re-design the system, get the guaranteed tax revenue now (not to mention yesterday’s deferred revenue), and no-one will notice? Just like the new generation of workers, we have a Government looking for a quick economic fix.
The mood music within the Green Paper doesn’t fill me with confidence. It states that “In the context of the deficit and the continuing pressure on public finances” that tax relief must be sustainable in the longer-term. Further that “Sustainability of the system has been improved, with restrictions made since 2010 contributing over £6 billion a year to repairing the public finances”.
The NHS is supposedly “ring-fenced” from austerity. In the end, if pensions in old age run out, won’t the NHS be picking up long-term health care costs? Hence isn’t there an argument for protecting the tax reliefs on pensions?
OK – the current system isn’t working. But the reasons why need detailed consideration. We need to consider the wider issues as to why participating and contribution rates are so low. That means considering financial education, moving away from the word “pensions”, how to improve the perception of the industry, how to change mindsets. And what worries me is that the current focus is on simply balancing a short-term issue without considering what issues that is storing up 30, 40 or 50 years forward.
It’s the elephant in the room. It’s massive. And we need to think and talk about it.