My Solution To The Pensions Crisis

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?

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20 thoughts on “My Solution To The Pensions Crisis

  • Dealing with existing pension pots is one thing but isn’t the real problem getting young people in particular, interested in the process of saving for future events whether that be retirement or some other situation in their lives.

    Since 2004 we have replaced pension products in our GPP arrangements with individual Transact on line accounts for each individual scheme member.

    The transformation of the interest in the pensions process for both employer and employee has been absolutely remarkable. We have seen many additional inputs into the accounts by members from transfers of previous scheme monies to ISA’s and so on.

    The transparency of the Transact online process and the involvement of individuals with their pension arrangements has demonstrated that people do want to save if the proposition is the right one.

    We have charged 1% on all contributions and our usual 1% amc which does mean there are obvious cash flow problems in the early days of an arrangement. However once you can see the snowball gathering size each month you do get the confidence that you are growing something worthwhile for you and your clients.

    We really do believe that there is a massive demand for what we offer and that people do welcome a transparent economic way to provide for future events in their lives.

    Reply
  • Chris. I think it’s an interesting take on it. Def requires more thought. Challenges are some blocks to pensions today are that it’s locked away. This might just put the chastity belt on it.

    Also, not a definitive, but people with bigger dc pots are more likely to have wealthier kids. So is it solving the problem of the people most in need? Don’t have the absolute stats on this.

    Bunch of other things, like better to pay of debt etc.

    However, don’t think it’s a bad idea and definitely something to be closely looked at. You can see it could become cost neutral – just need to sense check what problem it’s solving and does it do enough?

    This is why government, industry and advisers need to work together on this, as ideas like this come from people who see the problems.

    Problem as phil puts in previous blog is who is actually going to grab this and start answering the big questions.

    Reply
    • Thanks, Dave.

      In my experience the idea of it being ‘locked away’ often refers to losing all capital on death and not being able to pass it on. I think inter-generational (as Chris Dames has snappily coined it!) would actually make pensions more attractive for many.

      Reply
  • Hi Chris,

    I like the idea of allowing inter generational pension transfers and implementing the idea could play a small part in solving the pensions crisis…however it’s not the solution.

    The reason this doesn’t solve the pensions crisis…….

    The amount of individuals who will have the opportunity and additional means to leave ‘spare pension money’ to their children will be a relatively small percentage of the UK population.

    The children who could potentially receive gifted pension money are likely to be a small percentage of the UK population too.

    Therefore I’d agree that a ‘pensions through the generations’ rule would help….it wouldn’t go too far towards closing the gap and, I believe, fall far short of solving the problem entirely.

    Whilst Auto Enrolment compulsion will encourage individuals save more for retirement I believe that making “Product” changes or changes in particular rules which allow more flexibility is just tinkering.

    I believe that the only way to do this is to work to change saving behaviours). How to change saving behaviours? What happens when they get to this place?

    Reply
    • Good comment Chris. At the moment the options are lose it all (annuity, DB) or 55% tax. Perhaps there could be a tax charge (could even be part of the estate calculations for IHT), but the tax charge specifically funds a means tested pension,

      Just a thought!

      Reply
  • I don’t hate it, Chris. I even like bits of it.
    If we have intergenerational transfer, it must protect the fund for the retirement income of any family member. Tax it at the basic rate, even, but we should protect the money for pensions.
    After all, the fund benefited from tax shelter in order to provide an income in retirement and we should guard that jealously.
    People don’t realise it yet, but when there are no DB schemes left in the private sector and before any risk-sharing enters into DC, people will start to realise the benefit of the tax breaks, even if that means locking away their cash for longer. Where else can they get that kind of return in the kind of markets we are looking at for the next generation?
    And early access may seem attractive, but it is a red herring. It;s just another way of blowing your loot rather than providing an income. The point made earlier about people with DC pots having wealthier kids may hold true now, but with AE, that will change. And fast.
    We certainly don’t want to go the way of 401k in the US, because that has proven to be a busted flush, with people viewing it as a fund that can be used to pay off debt or buy a boat before retirement, rather than provide an income.
    You omitted one important point about the last generation and that is the systematic exposure of consumers to levels of debt they could ill afford.
    The Tories did it because they wanted to deregulate the market and dismantle what it saw as the institutionalised Keynesian mindset.
    New Labour based its economic policy on people spending money in the high street and growth, wherever it came from, was good.
    We need to break this cycle, compel people to save, reward them for doing so – especially above and beyond the minimum – and tear down this concept that everyone is entitled to cheap credit.
    Credit is cheap – and always has been – if you don’t really need it. For the rest of us, it should be based upon the ability to repay, just as it always was in the past.
    If you can’t afford it, you can’t have it. And if you don’t start saving, you won’t be able to afford it.
    In addition, stop relying on house prices and legacies for income in old age. As sure as eggs is eggs, we’ll be paying more for care in our dotage and this will have to be factored in any future wealth calculation.
    Downsizing may also prove more expensive as fewer people can afford – or fill – larger family homes.

    Reply
    • Fundamentally agree with you, Padraig. By allowing intergenerational transfers and NOT paying out to individuals on death, more money will be ring fenced for retirement income and retirement income alone.

      Reply
  • Interesting debate and this clearly shows the need to help more people engage in saving for the long-term. Policy has, for far too long, focussed on borrowing and debt as the way to future growth, which is a short-sighted approach that seems to ignore the need to repay debts. Borrowing, especially in an aging population, just brings forward growth from tomorrow to today, but that means growth will be lower in future. The need for a revival of the savings culture is urgent. However, I am not sure that we will achieve that if we focus only on one product – pensions. People nowadays may want a more flexible approach to savings and pensions are only one part of that. We need more flexibility to get people to put money in and also need more flexibility on withdrawal of later life income. The idea of passing money onto the next generation is a great one, but the average person currently does not have enough for themselves, never mind for others too. And pensions make no provision for expensive care needs in later life which so many more of us will face (that’s good news as it means we’re living to older ages, but just need a bit more help!)

    I would favour having family savings plans, that can provide collective savings for pensions, care or other needs, including things like grandchildren’s education. This would be a radical new approach. The savings would be more flexible, but still tax advantaged with the best tax breaks for money that is untouched perhaps or needed for care for oneself or a loved one, and the approach could recognise that people will need to take money out along the way during their lives.

    Much to think about, but the reality right now is that most people simply won’t have enough pension savings to pass on to others unless they die earlier than expected.

    Reply
    • Thanks for the comments, Ros, which I can’t disagree with. I think I should have called the article “One Solution To The Pension Crisis That Will Only Work In Conjunction With Other Solutions Such As Encouraging Savings”!

      Reply
  • I agree with Ros here. Wen you ask normal people – non industry or profession people – they don’t see a the family savings Plan as radical.

    It’s pretty much how people see it now with other things. But as an industry we are too hung up on legacy, margins to protect, interests to preserve. Despite what is said there are a bunch of people in industry who benefit from complexity.

    If we had the one plan you could give it staged relief based on how long it stays invested. Only locking it away for pension or long term care once you give the word. Effectively the savings equivalent of offset mortgage. But you could access particularly the long term care element if you did need it. Or as you say chris, could be passed on

    Interestingly it would change the role of advisers significantly if we removed the complexity of tax wrappers. I think for the better. I’ve had 3 meetings with my adviser and not yet talked about product, so I think it would led to better outcomes all round.

    Reply
  • I agree with Ros here. Wen you ask normal people – non industry or profession people – they don’t see a the family savings Plan as radical.

    It’s pretty much how people see it now with other things. But as an industry we are too hung up on legacy, margins to protect, interests to preserve. Despite what is said there are a bunch of people in industry who benefit from complexity.

    If we had the one plan you could give it staged relief based on how long it stays invested. Only locking it away for pension or long term care once you give the word. Effectively the savings equivalent of offset mortgage. But you could access particularly the long term care element if you did need it. Or as you say chris, could be passed on

    Interestingly it would change the role of advisers significantly if we removed the complexity of tax wrappers. I think for the better. I’ve had 3 meetings with my adviser and not yet talked about product, so I think it would led to better outcomes all round.

    Reply
  • Interesting debate and this clearly shows the need to help more people engage in saving for the long-term. Policy has, for far too long, focussed on borrowing and debt as the way to future growth, which is a short-sighted approach that seems to ignore the need to repay debts. Borrowing, especially in an aging population, just brings forward growth from tomorrow to today, but that means growth will be lower in future. The need for a revival of the savings culture is urgent. However, I am not sure that we will achieve that if we focus only on one product – pensions. People nowadays may want a more flexible approach to savings and pensions are only one part of that. We need more flexibility to get people to put money in and also need more flexibility on withdrawal of later life income. The idea of passing money onto the next generation is a great one, but the average person currently does not have enough for themselves, never mind for others too. And pensions make no provision for expensive care needs in later life which so many more of us will face (that’s good news as it means we’re living to older ages, but just need a bit more help!)

    I would favour having family savings plans, that can provide collective savings for pensions, care or other needs, including things like grandchildren’s education. This would be a radical new approach. The savings would be more flexible, but still tax advantaged with the best tax breaks for money that is untouched perhaps or needed for care for oneself or a loved one, and the approach could recognise that people will need to take money out along the way during their lives.

    Much to think about, but the reality right now is that most people simply won’t have enough pension savings to pass on to others unless they die earlier than expected.

    Reply
    • Thanks for the comments, Ros, which I can’t disagree with. I think I should have called the article “One Solution To The Pension Crisis That Will Only Work In Conjunction With Other Solutions Such As Encouraging Savings”!

      Reply
  • I don’t hate it, Chris. I even like bits of it.
    If we have intergenerational transfer, it must protect the fund for the retirement income of any family member. Tax it at the basic rate, even, but we should protect the money for pensions.
    After all, the fund benefited from tax shelter in order to provide an income in retirement and we should guard that jealously.
    People don’t realise it yet, but when there are no DB schemes left in the private sector and before any risk-sharing enters into DC, people will start to realise the benefit of the tax breaks, even if that means locking away their cash for longer. Where else can they get that kind of return in the kind of markets we are looking at for the next generation?
    And early access may seem attractive, but it is a red herring. It;s just another way of blowing your loot rather than providing an income. The point made earlier about people with DC pots having wealthier kids may hold true now, but with AE, that will change. And fast.
    We certainly don’t want to go the way of 401k in the US, because that has proven to be a busted flush, with people viewing it as a fund that can be used to pay off debt or buy a boat before retirement, rather than provide an income.
    You omitted one important point about the last generation and that is the systematic exposure of consumers to levels of debt they could ill afford.
    The Tories did it because they wanted to deregulate the market and dismantle what it saw as the institutionalised Keynesian mindset.
    New Labour based its economic policy on people spending money in the high street and growth, wherever it came from, was good.
    We need to break this cycle, compel people to save, reward them for doing so – especially above and beyond the minimum – and tear down this concept that everyone is entitled to cheap credit.
    Credit is cheap – and always has been – if you don’t really need it. For the rest of us, it should be based upon the ability to repay, just as it always was in the past.
    If you can’t afford it, you can’t have it. And if you don’t start saving, you won’t be able to afford it.
    In addition, stop relying on house prices and legacies for income in old age. As sure as eggs is eggs, we’ll be paying more for care in our dotage and this will have to be factored in any future wealth calculation.
    Downsizing may also prove more expensive as fewer people can afford – or fill – larger family homes.

    Reply
    • Fundamentally agree with you, Padraig. By allowing intergenerational transfers and NOT paying out to individuals on death, more money will be ring fenced for retirement income and retirement income alone.

      Reply
  • Hi Chris,

    I like the idea of allowing inter generational pension transfers and implementing the idea could play a small part in solving the pensions crisis…however it’s not the solution.

    The reason this doesn’t solve the pensions crisis…….

    The amount of individuals who will have the opportunity and additional means to leave ‘spare pension money’ to their children will be a relatively small percentage of the UK population.

    The children who could potentially receive gifted pension money are likely to be a small percentage of the UK population too.

    Therefore I’d agree that a ‘pensions through the generations’ rule would help….it wouldn’t go too far towards closing the gap and, I believe, fall far short of solving the problem entirely.

    Whilst Auto Enrolment compulsion will encourage individuals save more for retirement I believe that making “Product” changes or changes in particular rules which allow more flexibility is just tinkering.

    I believe that the only way to do this is to work to change saving behaviours). How to change saving behaviours? What happens when they get to this place?

    Reply
    • Good comment Chris. At the moment the options are lose it all (annuity, DB) or 55% tax. Perhaps there could be a tax charge (could even be part of the estate calculations for IHT), but the tax charge specifically funds a means tested pension,

      Just a thought!

      Reply
  • Chris. I think it’s an interesting take on it. Def requires more thought. Challenges are some blocks to pensions today are that it’s locked away. This might just put the chastity belt on it.

    Also, not a definitive, but people with bigger dc pots are more likely to have wealthier kids. So is it solving the problem of the people most in need? Don’t have the absolute stats on this.

    Bunch of other things, like better to pay of debt etc.

    However, don’t think it’s a bad idea and definitely something to be closely looked at. You can see it could become cost neutral – just need to sense check what problem it’s solving and does it do enough?

    This is why government, industry and advisers need to work together on this, as ideas like this come from people who see the problems.

    Problem as phil puts in previous blog is who is actually going to grab this and start answering the big questions.

    Reply
    • Thanks, Dave.

      In my experience the idea of it being ‘locked away’ often refers to losing all capital on death and not being able to pass it on. I think inter-generational (as Chris Dames has snappily coined it!) would actually make pensions more attractive for many.

      Reply
  • Dealing with existing pension pots is one thing but isn’t the real problem getting young people in particular, interested in the process of saving for future events whether that be retirement or some other situation in their lives.

    Since 2004 we have replaced pension products in our GPP arrangements with individual Transact on line accounts for each individual scheme member.

    The transformation of the interest in the pensions process for both employer and employee has been absolutely remarkable. We have seen many additional inputs into the accounts by members from transfers of previous scheme monies to ISA’s and so on.

    The transparency of the Transact online process and the involvement of individuals with their pension arrangements has demonstrated that people do want to save if the proposition is the right one.

    We have charged 1% on all contributions and our usual 1% amc which does mean there are obvious cash flow problems in the early days of an arrangement. However once you can see the snowball gathering size each month you do get the confidence that you are growing something worthwhile for you and your clients.

    We really do believe that there is a massive demand for what we offer and that people do welcome a transparent economic way to provide for future events in their lives.

    Reply

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