The pensions runaway train gathers speed

March 14, 2008

Few people are more on the pensions money than Scottish Life’s Steve Bee. And he has some strong views in his latest “BeeHive” post following publication of our exclusive story on the soaring costs of setting up “personal accounts” — the government’s brainchild aimed at solving a looming pensions crisis.

Reality seems to be kicking in early on in the dream, says Bee, who finds the whole thing “really depressing”. A chink of light amid the gloom came in this week’s Budget, he says: the extension of the ability of pension fund managers to allow trivial commutation of small pension pots should make things easier and cheaper for occupational pension schemes. But, sadly, such rights are not to be extended to personal pension schemes, a move that only serves to “drive a horse and coaches through the whole idea of our having one simple set of pension rules for all types of pension scheme”.

Others point to the failings of other Budget measures. The formation of a “Savings Gateway”, again aimed at low and moderate earners, might seem like a nice little give-away. It will attract government matching on money saved into the scheme. But, viewed alongside personal accounts, it prompts serious questions, says Tom McPhail, head of pensions research at Hargreaves Lansdown — another leading commentator on the world of pensions. “If the government’s going to match savings pound for pound and your money isn’t locked in until retirement, then surely people will choose that over signing up to personal accounts,” he says. “And the generic advice model proposed by Uncle Otto will simply not be sophisticated enough to cope with these kinds of choices. It strikes me that in themselves these are all good ideas. But throw them together and it’s like cats in a bag.”

Perhaps, then, the answer is something far more simple. Rather than spending billions of pounds on building an “untried and clumsy” pension scheme, wouldn’t we all be better off if those billions could be channelled into directly boosting people’s pension entitlement, asks Bee. This vast sum of money could instead provide a decent basic state pension entitlement for everyone, providing a solid bedrock for private pension saving.

He is not the only one of that mindset. As another leading light, who wished to remain nameless, said to me this week: “If you’re going to spend 2 billion pounds, why not just set up an account and put a lump sum in there for that part of the population (low to middle income earners) that they can’t touch until they’re 65, rather than have all these intermediaries all taking a cut, all making a profit?” Hear, hear.

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Prior to A-Day (6th April 2006), a pension could be commuted on the grounds of triviality if it was under £260 p.a. This was introduced under legislation in the early nineties. With inflation the current capital value would be nearer £8,000. So, whilst the new £2,000 figure is a welcomed start, with more foresight it would have made much more sense to listen to the pensions industry who have been lobbying for a higher figure.

Mike Jones

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