Anyone who knows me in pensions knows that I don’t like Defined Contribution (DC) pensions. They also know that I do like Defined Benefit (DB) pensions, that I believe these to be the most efficient way of providing pension benefits and that I am convinced that better regulation and scheme design is all that is needed for these to thrive again. However, it is hard not to accept that the change in direction that would be needed for this to happen is huge. So in the meantime we need to make DC better.
We need something new
DC pensions are actually nothing new. In fact I would go as far as saying they are very old, as old as DB pensions. What’s changed is that long ago when DB thrived DC was targeted at high net worth people who wanted control of their investments. Now DC is being targeted at the masses who don’t. What they want is either pension or savings. My biggest criticism of DC pension schemes is that they are not pension schemes, they are tax advantaged savings with strings attached.
Today’s world is very different and the young people of today have different problems. Is it right that we (as a nation) are trying so hard to encourage them to put money into a pension policy that they can’t access for 30, 40, maybe even 50 years. I certainly don’t want to and dislike the tax incentives that mean I sometimes feel I have to.
A new form of savings account
If we started with a blank sheet of paper what would we like to achieve?
I think we would look to achieve the following:
– Something that encourages people to save.
– Something that allows people to use money how they want.
– Something that encourages people to make long term savings such as for retirement
How can we achieve this?
– Tax relief on savings made (in line with relief currently on pension savings)
– Complete flexibility to take the money when you want (like an ISA)
– Pay back of tax relief on withdrawals made before retirement (to provide a disincentive to early withdrawal)
The current tax positions and flexibilities of both pensions savings and ISAs would be replicated but people wouldn’t have to make the choice of pension or ISA. Savings would be there to be used when needed.
This would be revenue neutral to the extent that we are happy with the current tax relief position of pensions and really mean it when we say we want to encourage more savings.
It would also come with the advantage of being able to abolish DC pensions with a rebranded ISA, a name that people trust.
Let’s really have a savings revolution.