Morning Line: Is pension compulsion the only answer?

Why would any basic rate taxpayer save into a pension? Ok so you get tax relief when saving but you pay that tax relief back through basic rate tax when drawing your pension. Another rip off point is the fact that insurers are cutting annuity rates alarmingly so tjat only the insurance companies will benefit.

The comment in the last paragraph "The current overgenerous tax relief is, in effect, transference of wealth from the poor to the rich." sounds very powerful. But what is really saying and is true?

The answer is that the logic presented does not lead to this conclusion. I agree that pensions tax relief benefits high earners more - that in itself this is not taking money off the poor.

Forcing people to do anything is very negative and wont be at all popular.

We need a bit more "carrot" as opposed to wading in with the big stick that is compulsion.

This Government has already announced that the compulsory purchase of annuitues is to go (probably!) so there is some hope that pensions will become more attractive.

I just hope they keep things simple and dont make our hideously complex pension system even harder to understand.

Ron - basic rate tax payers benfit a great deal as they get to use thier tax allowance in old age over a larger number years.

Also the annuiety rates are very largely defined by the long terms gilt rates. These are so low today that it is stupid. The insurance companies can not be held 100% responsibile for this and I have seen no evidence that they are profiterering.

Regards

Geoff

As the Default Retirement age is being removed most people will keep working and pensions are not worth paying into these days - they just get taxed and then you get penalised with having to pay council tax for having one anyway. If you dont have a private pension or a lot of savings whn you retire you get everything for frre and that is my plan. All this nonsense about having a pot of 6 figures is nonsense. Just save plenty to pay the utilities for say 15 years, e.g £25,000 and just use your pension for food and entertainment. Simple. Keep £10 K of your savings secret though or you ject get penalised.

For lower earners especially, the benefit of receiving tax relief on pension contributions can be far outweighed by the fact they're saving money they won't be able to access for 30 or 40 years or so. Couple this with the fact that you've little idea what income to expect at retirement based on any given fund value, due to fluctuations in annuity rates and personal pensions don't look a very attractive proposition. It's much like placing a large bet on a horse race that'll last half your life and where you don't know the odds.

For employers, pension benefits are currently far too easy a target when it comes to cost-cutting, not only with DB schemes where the sums involved can be very much life-and-death, but in DC schemes too (as with American Express last year - was stopping 3% employer contributions really necessary?). Some sort of employers' compulsory minimum contribution (like Australian superannuation) is the way forward. Currently we have an enormous lottery where employers will contribute between nothing and ~20% of salaries (the latter to service DB schemes) which seems to be dependent on the ideology of any given company's board.

It cannot be left to the government to pick the pieces as a consequence of people failing to save for their future on retirement. Savers have got to be rewarded for their prudence if not the only option is compulsion. The state cannot afford to keep an aging population. But no Government is prepared to make any radical changes as it wants the savers to spend to move the economy on. So nothing will happen for the foreseeable future and it will just drift until it is too late.

I don't believe that complex pension rules and tax systems stop savers (although they don't help). It is the fact that low earners simply cannot afford to save in the first place that stops them.

If someone has the inclination to save for their retirement they will, whether they use a pension or something else.

As someone receiving a very comfortable DB scheme pension I am only thankful that my old employer had such a scheme in place or I probably wouldn't have bothered doing anything about it. However to get similar benefits that I am now on from a DC scheme I would need a pot worth over £600K and even though I had a good job I can't see any way that I could have saved that much. God help the next generation..........

I think a flat rate of 30% tax relief at source on all pension contributons has some merit.

So HR tax payers will be discouraged from saving, but they can afford to save anyway. BR tax payers will now have a much greater incentive to save for retirement.

Yes, compulsory personal pension of some kind must be brought in if we are to prevent generation after generation saving nothing for retirement.

Also - I don't buy this ISA / Pension hybrid idea? Obviosly if people have savings that are for retirement, many would dip into them if they could. People have a habit of wanting / needing things now, so pensions must be protected savings that can only be accessed in retirement.

There are quite a few sage comments above.

The tax benefit on paying into a scheme is a carrot, but not enough.

The major problem, in the present climate, is the removal of the tax relief in '97 which resulted in virtually all pension schemes being hit badly, and when combined with the drop in the market, this was the double whammy, probably very intentional on the part of Brown/ Balls, redistributive, putting them all as being underfunded.

Even before the drop of the market many schemes were underfunded because of the removal of the relief for embryo pension pots.

If the govt does not want to have to later make up the benefits because of the inadequacies of the pots they need to reinstate the relief which will, nearly but not quite, go a long way to reducing the shortfall in the pensions funds. Problem, they desperately need funds now so cannot afford to let go of the continuing robbery instituted by Brown/Balls/Zanuliebore. Now who is going to investigate and charge the aforementioned and HMRC under the money laundering legislation, the proceeds of 'crime'.

Better the present govt make a start and to further encourage pension savings by reinstating in part the 'relief' and adding over the next few years until full relief achieved. Painful for the govt, but it would be a real step forward, and result in healthier pots and allow the contributors to enjoy the fruits of their labours. The long term savings for the govt would far outweigh what they are foregoing now and give credence to their statements that they are for savings and provision for the future rather making statements which turn out to be meaningless mealy mouthed statements made for effect..

It is not just a question of contributions by the employers and employees, the govt must also 'contribute', by taking out their sticky fingers out of the pots and ban 'holidays' and the stealing with menaces for 'overvalued' pots, which have turned out to be wrong. If they take anything from the pension schemes, an element of the 'overvaluation' on the death of the pensioner/spouse, and also remove the penal rate of taxation on death for SIPPS, and allow to be bequeathed to the heirs.

Govts need to remember they have no automatic right to our honestly earned money/savings, take note Brussels.

PS, over bureaucratic regulation (high cost to run and maintain) should be banned.

Private pensions - A total waste of time and money for most ordinary people these days. Only the rich will be able to retire, everyone else will have to work until they die. Avoid the pension scam and keep control of your own money to use as and when you see fit.

The pension fund management costs are probably 1-2% annually which will probably more than outweighs the tax relief received by a basic rate tax payer. Added to which there is the uncertainty of investment returns and annuity rates. I am retired , worked for 48 years,in an industry which did not provide job stability together with takeovers,mergers and job moves meant I finished up with five small private pensions which are NOT index linked. I have been able to save and invest in investment trusts and ordinary shares which has made a huge difference. With hindsight I would not have bothered with pensions,I should have put the money into good investment trusts..The Govt should work towards raising the basic state pension, abolish the winter heating allowance,free TV licence and other means tested benefits. This would remove the disincentive for for people to save for their retirement. Abolishing the older persons personal tax allowance would mean the more affluent pensioners paying more tax, which could be used to offset some of the cost.. There would also surely be a significant reduction administration costs.. Retired people would still have a great benefit in not paying Social Security Tax - a significant cost for those still working.

As I always see on a personal pension related topic on Citywire, there are some very well thought out rational responses from some people on here who know the facts surrounding pensions and the various reliefs and incentives. But then there are those who have merely read a fearmonger newspaper article and decided to use the 'we;re all getting screwed, all of he time' philosophey as if the whole concept exists only to exploit people. IT DOES NOT. Granted it is not perfect, but lets address a couple of issues here regarding defined contribution schemes:

1) State benefits in retirement, you will not get anything for free if there is no money to pay for it, those days are drawing to a close, never bank on handouts else you might end up ending your days in a freezing flat surrounded by crack smoking yobos (I smell an Aviva advertising campaign coming on)

2) tax relief within a pension fund: Yes the dividend tax credit was stolen (no other word for it) in 1997 by a man I'd like to see put in stocks at the very least BUT: Only an extreamly astute investor (who I'd expect to be a higher rate tax payer anyway) or an idiot/badly advised person is going to invest thier pension 100% equity 100% of the time. There should be a diverse mix of dividend and income paying assets within a fund, any income producing assets such as strategic bond placements etc will have tax fully relieved for all. Dont; forget if you're using a SIPP you can use fixed interest accounts and structured products too, there are no CGT liabilities arising either for liable assets.

3) at the point of retirement, when the insurance company (assuming it is an insured contact in this instance) sends you the annuity rates they are offering, go and speak to an IFA, from there you can compare rates across the whole of the market, your rights to an enhanced annuity (thousands of people are entitled to one and don't know!) can be assesed and your actualy personal circumstances can be looked at as it may even be the case that the unsecured pension route may be initially more beneficial to you. Also there are many colours of the annuity rainbow (though black and grey can see predominant)

If you go into pension planning with the mindset that you are betting on a single horse to come in in the future, then you have lost before you even began. Pensions need to be reviewed annually (perhaps even more so in the later years), circumstances change affordability of premiums increases/decreases and the overally risk tolerance of the underlying funds needs to be modfiied as reitrement draws closer to avoid dissapointment. I am not saying that personal pensions are perfect in thier current incarnation (they are far from it) but they are an essential tool for funding retirement and proper planning should be carried out to ensure a reasonable standard of income in retirement. - I await a kick in the pants for my poor spelling!

When my retirement was looming I sought the advice of an IFA, the fee amounted to 25% of my nett annual pension. there is also the annual management charges which had been paid over the years. I remain to be convinced that pensionjs are a worthwhile option for those with average or less earnings.

Brian if you did an annuity purchase and chose commission option this would have been typically limited to 1% of the purchase price (2% for an enhanced annuity) as for the AMC, no investment vehicle be it investment bond, ISA or anything else will not charge you an AMC, I am afraid that no institution in financial services wil work for without making a profit (this means administration chagres etc all have to be accounted for). The fee option is available but until 2012 you should be offered commission as well, i think that a good IFA should give you an illustration based on each remuneration method so that the client can make an informed choice, after all we are here to advise not to force hands. If you could let me know what your age at retirement was, the type of annuity and the net annual income I could perhaps try and convince you, although I completely understand if you would prefer not to disclose this information as you have posted under your actual name and these are very personal questions.