It’s time for pensions to sit above politics
The UK faces a demographic challenge that requires government to come up with a for pensions based on a long term plan not short-term political need, says Mike Morrison, head of Platform Technical, AJ Bell
As is often the case at this time of year, we’ve recently seen an influx of pension statistics and research reports, many of which, I would argue, are in general agreement.
There is real interest in the official figures on auto enrolment and the cost of tax relief. Let’s take a look at what we already know:
• Personal pension contributions reached a record high in 2015/16 with 9 million people contributing £24.3 billion into personal pensions (this exceeded the pre-financial crisis high in 2007/8 of £20.9 billion)
• At the same time, the average annual contribution per individual has fallen from £3,690 in 2011/12 to just £2,690 in 2015/16
• The net tax relief figure was £24.8 billion (taking into account tax deducted from pensions in payment)
• Occupational pension scheme membership hit a new high as auto enrolment continues to be something of a success
• Defined benefit provision continues to fall as employers close schemes
So tax relief is up, the number of people saving is up yet all is not quite right as average contributions are down compared to the peak of 2011/12. We have increased participation but the average total contribution rate is just 4.2% of pensionable salary. If we assume 40 years of savings on an average UK salary that will produce a pension pot of around £125,000, which we know is probably not enough to provide a decent income for 30 years of retirement.
Minimum contributions are due to rise to 8% by 2019 which is better, but even then external sources have suggested a lifetime contribution rate of nearer to 15% of salary would be better. Obviously this also assumes that employers and employees accept the rise and do not opt out. This is a big ‘if’. Further employer contributions and employee contributions come straight out of the ‘profit’ or the ‘pocket’ and with the possibility of increasing inflation and higher interest rates further saving might not be an easy choice. In addition, a large part of the population – including the self-employed and those earning less than £10,000 – are currently excluded from auto-enrolment.
So that seems to be where we are – but what is the context to this?
There is a lot of research out there showing the effects of the ageing society, with one recent report suggesting that nearly half of UK adults will work beyond the age of 65 and that some 13% say they will never retire. Pensions and retirement is a key societal subject encompassing an ageing population, putting pressure on the NHS, long-term care and other social services.
Intergenerational unfairness is also key with a smaller number of tax payers and a greater number of benefit ‘receivers’ – the success or failure of what we do today will have significant effects in the short, medium and long term.
It is also coming up to Budget time and there is increasing speculation (as always) that the Chancellor, Philip Hammond, will take an axe to pension tax relief. It is vital that the positive effects are not ignored by a Treasury desperate to raise cash. There is talk of a reduction to the Lifetime Allowance and/or the Annual Allowance, not to mention talk of abolishing higher rate tax relief or moving to a flat rate.
Pensions have suffered from years of chopping and changing of tax incentives, often without logic. Surely it is time to devise a proper long-term approach that sits above the politics. I am not against change, provided it is based on a plan that addresses the long-term demographic challenges we face, rather than a simple desire to fund a short-term need.