Andy Masters, KPMGWe’re at an interesting point with pensions. Auto enrolment has created a new tranche of pension policyholders but the question for policy makers remains: how do we incentivise and educate society to create a nation of long-term savers?
Tax remains an important lever to attract long-term savings. What will happen if a future Chancellor ends higher rate tax relief on contributions or scraps tax free cash to help fund pensions for the less well off? This would probably be good news for ISAs but it’s not risk free as individuals may be tempted to cash these in early and destroy their long-term savings.
There is also an issue around the 15 percent of the population that is self-employed. Auto enrolment does nothing to motivate this significant and growing sector to invest in pensions. Maybe there is a role for compulsory savings here?
So if the incentives are clear, how can we educate people out of the assumption that saving for a pension is something that can be deferred? Schools are key and media campaigns are important but any public education effort needs to be meaningful and sustained. It has to get people to the point where they realise that funding a pension is not the responsibility of others. This is a difficult mindset to change when society is, I believe, still able to access cheap debt to fund a consumption-based lifestyle.
Pension savings also needs to be transparent and value for money. Easier ways for individuals to consolidate and transfer savings would help here, as would making managing a pension more akin to digital banking services. In fact why can’t the majority of individuals see all of their savings in the same place as their transaction banking arrangements? The technology exists and would at least provide visibility of long-term savings values to a wider audience.
Finally, come April, the industry will respond to the new freedoms with new products offering greater flexibility. And Pension Wise, the government-backed advice service, will be in place. How that provision operates in reality will be important to watch.
It’s also going to be important for government and the pensions industry to ensure that freedom of access and creative new propositions don’t necessarily deter people from taking up annuities where those are clearly the right choice for many.
Andy Masters is Insurance Advisory Partner at KPMG.
Andy will be discussing ‘What next for pension savings?’ at the ABI Retirement Conference on 25 February 2015. Watch his video preview below.