It’s safe to say that over the last 50 years Britain has been through a period of rapid change.
As a nation, we’ve witnessed ever increasing standards of living; growing levels of prosperity; and, as a result, people are healthier, fitter, and living for longer.
And while longevity is undoubtedly a good thing, it does present some challenges for Government policy.
In particular, we want to ensure that people have the resources to enjoy their retirement, to maintain a decent lifestyle, and take advantage of the more prosperous society that they’ve helped create.
We need a country where people are better equipped to plan for the future… which is as much about a change of philosophy as it is a change of policy.
What I want to create is a culture of personal responsibility. Where people understand the value of saving; the benefits of planning for the future; and the importance financial prudence.
But this won’t be easy.
By our very nature, we’re not the most forward looking of creatures - given the choice between spending money today and putting a little aside for tomorrow, we tend to be rather predictable.
When it comes to personal finance, human nature often favours the idea that ‘tomorrow will never come’… when the reality tends to be quite different.
Coupled with this, our modern lifestyles have added a new level of complexity to saving, which can lead to consumers feeling slightly disillusioned.
Gone are the days when a person would have just one job for their entire life; one pension scheme managed by their employer; and only one source of income in retirement.
Now it’s far more likely that the conscious consumer will retire with five, six, seven or more financial assets. Whether they are ISAs, savings accounts, bank deposits, equity in their home, stocks, shares, bonds - I could easily go on.
In this environment, it’s become increasingly difficult for people to determine where to put their money. And too often, people give up before they’ve even started.
So, from my perspective, there are three questions we need to answer.
First, when facing the pressures of an aging population how do we encourage saving for retirement that is both fair and sustainable?
Second, how can we create a market that’s more flexible, and better suited to the needs of the consumer?
And third, with greater choice and flexibility, how can we ensure that people make informed choices and select the products that are right for them?
Fair and sustainable
So, starting with the question of sustainability.
There’s certainly some rather difficult pressures to juggle.
On the one hand, we want to encourage people to save for retirement, and smooth their income over the course of their lifetimes. While on the other, we’re constrained by the current fiscal situation we’ve inherited, and the increasing costs that come with an aging population.
A clear example of this trade-off is pension-tax relief.
Yes, there’s an obvious case for providing tax relief… but the amount of relief is a far more complicated matter.
When we came to office, however, two things were clear.
That the amount of tax relief on pensions was unaffordable in longer-term, and that the previous administration’s plan to tackle the issue would create more problems than solutions. It would have:
- undermined pension savings;
- made the tax system more complicated;
- and - ultimately - damaged British competitiveness.
We’ve gone for a different approach - reducing the annual and lifetime allowances. This is a better proposition, as acknowledged in the PPI’s report.
Our approach will be:
- Simpler - it removes the complicated income test that was a feature of the previous Government’s proposal… making it easier to understand, and helping to improve pension planning;
- It’s better tax policy - as it should reduce ‘double taxation’, remove perverse incentives, and it works with the grain of the existing system, rather than casting it aside;
- And it will be fairer - preventing people from saving up to £255,000 a year in a tax privileged pension scheme.
In designing the policy we’ve also been mindful of the current direction and future landscape of pension provision. As PPI’s report points out, there has been, for many reasons, a general shift from defined benefit to defined contribution pensions in recent years.
Appropriately responding to the reduction of the annual and lifetime allowances should be straightforward for defined contribution schemes. However, we’ve also sought to create fairness and equal treatment between defined benefit and defined contribution.
So to value contributions in defined benefit schemes, we have chosen to maintain the current, simple system with a single flat factor to be used rather than a complicated age-based system.
I do, however, recognise that there are some outstanding issues… one of which being the potential for high charges for some members of defined benefit schemes.
That’s why we’re encouraging all parties to adjust their saving behaviour to mitigate this risk. We’ve also designed the pension’s tax regime so that the annual allowance can be carried forward for up to three years. And, where people still incur high charges for exceeding their annual allowance, we’re consulting on options to help them manage these payments.
Nonetheless, it is vital that we don’t undermine people’s desire to save through our actions to make the pension system more sustainable.
So our actions have ensured that the pension tax regime remains generous. Despite the reduction in the allowance, people will still be able to save £50,000 tax-free a year, and £1.5 million over their lifetime, can buy a pension of around £70,000 per annum with a tax-free lump sum of £375,000.
Yet sustainability extends beyond making pensions affordable to the Exchequer… sustainability is also about the individual: about ensuring that people can save for their old age, and choose the options that best suit their individual needs.
More flexible pension provision
That’s why, as a Government, we want to make savings more flexible… to suit the needs of individual consumers.
We already have some flexibilities around accumulation of pensions savings, such as being able to take advantage of tax-free savings in an ISA, and then rolling them over into your pension pot.
These are a good start. But there’s still scope for making pension saving more flexible and, therefore, more attractive, encouraging more people to save more towards their retirement.
Currently there are too many rules that restrict the choices available to consumers.
One example I tend to use is the default retirement age.
With people living longer, they should also be able to work for longer if that’s what they wish to do. So we’re phasing out the default retirement age.
We’re also getting rid of the outdated requirement to purchase an annuity at 75.
As I know you’re all aware, we’ve taken forward a detailed consultation on the implementation of this policy over the summer… the results of which will be published tomorrow. And I’m very grateful for PPI’s contribution to this process.
If our reforms are to be successful, it’s vital that we work together to assess options for improving the current system.
So I’d like to announce that the Government will be issuing a call for evidence on early access to pension funds later this month.
I, personally, am keeping a very open mind on the issue. My main priority is to ensure that any policy changes are focussed on encouraging more people to save more towards their retirement, and we need to remain aware of the risks to people’s retirement income of increased flexibility. I would therefore very much welcome PPI’s analysis on the relative pros and cons of this policy.
Yes, we want to create a better market for pension provision, one that’s more flexible and better suited to the needs of the consumer. But I’m also mindful that with more options comes greater complexity.
As I said at the start, we understand the challenges people face when looking to save or plan for retirement.
Too often people delay saving, or simply don’t save enough.
For this reason, we’re making sure that from 2012 employees will be automatically enrolled in a suitable workplace pension scheme. We’re also committed to launching the National Employment and Savings Trust, to ensure there’s provision for people who are not currently served by the market.
We want to encourage people to take more of an interest in their own finances. To help consumers become more financially savvy, and encourage greater personal responsibility.
So we’re currently rolling out the new National Financial Advice Service - a free and impartial source of financial information. In tandem, we’re launching the annual financial healthcheck, to enable, and indeed encourage, people to regularly take a thorough look at their finances and help plan for the future.
Both these initiatives will promote greater financial responsibility… encouraging higher levels of saving; educating consumers about the costs of retirement; and showing people what they will need to save in order to maintain a decent income.
It is often the case that people underestimate what they will need to put aside to ensure they are able to provide for themselves in retirement, and there is a big job to be done in educating people to increase their understanding. We want to help people, help themselves - to make plans for the future, and be able to enjoy their old age.
So I hope this will help kick-off the evening’s discussion, and I apologise for having to rush off… Parliamentary obligations have cut my time short I’m afraid.
But before I go, I’d like to say that while the issue of savings and pensions rarely gets the coverage it deserves, there’s no doubting its importance.
Pensions policy, and our response to the wider issues posed by an ageing society, represents one of the biggest challenges facing any Government. And I’m grateful for the work of the PPI in shedding light on the many aspects of this debate.
With the demographic changes we’ve witnessed in recent decades, the questions surrounding sustainable personal finances, individual responsibility, and the role of Government in supporting these objectives… need to be answered.
Since coming to office, we’ve set out the first steps towards achieving a long-term resolution.
But there’s still more work to be done.
So I look forward to working with many of you here today to help deliver a more sustainable, affordable and flexible pension system.
One that meets the needs of the British people.
And encourages financial responsibility.