We all know the basics of the demographics problem we face in the UK. There is a pensions crisis on the horizon that my children’s generation are going to be getting the full force of.
How has this come about? The following is a rather simplistic summary of what’s happened:
- Robert Maxwell falls off his boat and the world discovers he had been ripping off the Mirror staff pension fund
- The Govt brings in a raft of legislation to protect members of staff pension funds
- Companies shut down their staff pension fund due to the increased legislation
- An ageing population means more people needing pensions
- The working population is more interested in spending and increasing debt than they are in saving
- This culminates in the Govt introducing legislation to try and force staff to join pension funds, albeit at a contribution rate of half (at best) what it was before Maxwell fell off his boat
What will happen next? Well, we can’t be sure, but my best guess would be that we will be sitting here in 10 years time still talking about the impending pensions crisis. Auto enrolment is a start, but only that.
But there is good news. I have the solution. A simple idea that could potentially solve the pensions crisis. For real.
It is this. Allow pension funds to be passed on to the next generation’s pension funds.
Some details – as we know, current rules say that on death before taking benefits the pension fund pays out to the next of kin, no tax. I’m proposing this be stopped.
Death after taking benefits allows the pension fund to be passed on to the kids (amongst other options) minus a 55% tax charge. I’m proposing this be scrapped.
The option of a widow’s pension via Drawdown (I still think that’s the best name for it) should continue, but any passing of pension cash to the next generation should be only into their pension fund(s). I’m not too fussed if HMRC want to grab a little tax on the way, to make the change tax neutral for the Treasury.
The result would be that the next generation would inherit a private source of retirement income, independent of the State. If they don’t use it (for example death before retirement) it gets passed on to their kids to use.
Imagine a 30 yr old who inherits a £100k pension fund. Not only would they have a major leg up in saving for retirement (making them less likely to be dependant upon the State), but they would also have more disposable income to spend now, thereby helping the economy.
The only flaw I can see is that annuities would be even less popular than they are now, and the Government might lose an important purchaser of gilts.
Anyone got any other comments? Have I solved the problem, or have I missed something?