‘Pensions are finished. I don’t think they have a future.’ Thus Michael Johnson, the Centre for Policy Studies expert on the subject. It seems an odd remark given that pensions are all about the future. Contributors look forward when they save; pensioners think about how long they’ve got before they expire. Yet Johnson is right. Pensions have had their day, and it’s typical of Britain’s dysfunctional savings market that this is happening just when the state is forcing more people into them.
For a young worker, retirement looks almost inconceivably distant, and there are many more pressing demands on his or her (probably modest, perhaps intermittent) income. It seems pointless to save for old age before buying a home or supporting a family — and because so many had reached this sensible conclusion, the last two governments decided that people had to be forced into pension schemes.
Thus came ‘auto-enrolment’ of every worker, down to the smallest businesses. This was clearly going to be so unpopular that the legislators opted for the frog-in-the-cooking-pot approach. At first, workers were required to contribute just 1 per cent of a slice of their pay. By October 2018, that will have heated up to 4 per cent, by which time it will be much too late to jump out. Employers will be obliged to match the amounts.
The malign effects of this nannying by the state are about to be felt. Take-home pay will stagnate as pay rises are forced into pension contributions. Further out, auto–enrolment will turn into a third income tax, rather as national insurance has metamorphosed into the second one. It will also discourage other forms of saving, with workers fooled into thinking that the proceeds of those deductions will be enough for comfort in old age. As any actuary can tell you, saving 8 per cent a year will not buy a pension anywhere near to even half your average lifetime salary. The principal beneficiaries of this gathering wave of savings will be investment houses collecting annual fees for managing — and all too frequently mismanaging — the pooled penny-packets of the lowest-paid workers.
The valedictory crowd-pleaser from the last government, allowing over-55s the freedom to spend pension savings however they like rather than being forced to buy an annuity, threatens to make things worse. Release from the miserable value of compulsory annuities is welcome, but the impression the move gives is that old age now starts at 55, little more than halfway through the average adult life. Yet even 55 will seem an unimaginably long time to tie up the (compulsory) savings of our 30-year-old worker trying to make ends meet. It’s also a racing certainty that the rules will have changed half a dozen times before then.
It’s not hard to see why politicians tinker with pensions, given the sums at stake. Following auto-enrolment, the Pensions Policy Institute estimates that the tax relief will be worth £35 billion a year, with 70 per cent of it going to higher-rate taxpayers. Those at the top can not only pay in more, but get twice the relief of a worker who pays only the standard rate. Thus, those who find saving most difficult get the least benefit from doing so. Since the purpose of the tax relief is to help citizens avoid being dependent on the state in their old age, this has always seemed perverse.
Today every political party is gnawing away at pension privileges, whether by shrinking the size of the tax-free pot or restricting the tax relief. The rules are hideously complicated, which is another reason why pensions are doomed. Individual Savings Accounts, by contrast, merely need an authorised intermediary to ensure that the £15,240 annual maximum subscription isn’t exceeded.
Because your ISA has nothing to do with your income, it’s of no interest to the taxman. Income and capital gains inside the wrapper are tax-free without limit, and any adult can play, whether in work or not. Add in a Junior ISA, and a family of four can invest £38,640 this tax year. Since ISA is Labour’s name for the Personal Equity Plan they adopted from the Tories, a radical assault on it looks unlikely.
It’s still not too late to reverse the nonsense of auto-enrolment, though time is pressing. The (after-tax) money could be just as easily paid into an ISA should the employee agree. It could even be made ‘compulsory’, since you can get at the ISA money any time you want. It also saves enough tax relief to finance a deep cut in National Insurance, but that’s another story…