In previous blogs we have attempted to explain and simplify the provision of pensions in the UK and introduced an alternative scheme to the present failing State and Private systems.
This was the proposed universal defined benefit contributory scheme, given in Blog 12 which will now be dealt with in more detail.
The first requirement was that Pension contributions should be recognised and treated as personal individual savings, which appears obvious and almost basic, but does in fact not occur. Normal savings are treated in this way with State compensation when loss occurs.
Pension funds appear to be anybody’s money, open to plunder and misuse and at the end of the creditor queue when Company failure occurs, but they arise from hard earned wages or as part of the employment contract and are personal savings.
Following on from this there needs to be a change in the way Funds are invested and managed, current investment options have become more speculative and short term and yet there is a shortage of Capital investment in all areas of social infrastructure like housing, energy, transport, schools, hospitals, care and recreation etc.
These do not offer the fast buck returns, which in any case long term pension funds should and cannot rely on. Funds should be segregated and managed by age, one can take risks up to mid forties, but funds need to be secure and available thereafter.
There is another good reason for segregation by age; that is to ensure a fair distribution of funds by the timescale of the contributions made, which could overcome problems of entry date, final salary etc.
A possible solution could be the purchase of unit funds, as in current private schemes, but with their value associated with age and fund performance. Starting at entry age 25, to give a full 40 years, funds are purchased at unit value £1, which increases annually by the basic fund compound target growth, say 4%; at 26 they will cost £1.04; at 27 cost £1.082 etc., new entries will pay the value appropriate to their age.
This should fairly reflect the value of contributions made and the number of year’s contributions and providing wages, contributions and growth exceed inflation will give benefit in real terms. Fund values and growth can be reviewed annually or every 5 or 10 years and bonus shares issued; if consistently higher, then the growth rate basis could be changed.
Early start at say 16 or even birth could be converted at the appropriate value at age 25 into the main scheme, which could be extremely flexible, allowing extra contributions, earlier retirement etc. Low fund build up from lower earners could be met by State contributions or welfare payments from bonus funds.
Fund continuity should also occur without any break at retirement and transfer of funds between investments should not incur bid/offer charges or differentials, in fact all costs and charges should come out of investment returns, (as with savings) and not from accumulated funds.
Tax free lump sums are not cost effective; they involve a third increase in contributions and are better used in reducing mortgage and other debt. They could be offered as an AVC with extra contributions and are not offered with the basic State pension, which allows contributions to be kept to a minimum.
Tax relief on pension contributions is still an essential inducement to pension savings, but at higher income levels taxpayer’s money could be better spent on state NI relief for pensions or a lower income contribution subsidy. It is suggested that this should be capped at the 20 % rate on the lower band level but increased for dependent partners, or set at 20% on all earnings.
Pension benefits of the scheme will be the subject of the next blog
Savings Annuities Public Sector NHS Teachers Police Local Government Hutton State Pension
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