Morning Line: Until tax allowances rise, pensions can wait

If the government is serious about wanting everybody to save for their retirement, then the sooner it moves to increase tax-free personal allowances to the £10,000 promised in the Coalition manifesto, the better.

Markets

Other markets

Market Data Notice

More market charts

by Lorna Bourke on Sep 27, 2010 at 11:46

Morning Line: Until tax allowances rise, pensions can wait

‘The cost of pensions to both employees and employers is the ‘big issue' that has prevented the extension of pension provision to date in the sector,’ commented Stuart Southall, chairman of the Association of Consulting Actuaries on announcing the findings of its Smaller Firms' Pensions Survey.

‘Whilst auto-enrolment may break the mould, if we are all still paying higher taxes to recover over-spending, it's difficult to see how this will not bump up opt-out rates,’ he said, referring to plans whereby employers will have to enrol all their staff into a company pension, unless workers specifically opt out.

The ACA survey found that employers believe that some 35% of auto-enrolled employees in the new National Employment Savings Trust, due to be introduced for small companies in 2014, will simply opt out rather than pay the 4% minimum pension contributions.

If the government is serious about wanting everybody to save for their retirement, and we can only assume that it is, then the sooner it moves to increase tax-free personal allowances to the £10,000 promised in the Coalition manifesto, the better. Or the 4% NEST contribution – which will hit the pay packets of some 10 million employees in 2014, just as the government is gearing up for an election - will be seen as just another tax rise.

Whatever incentives the government may or may not introduce in future to encourage people to provide for their pension, the bald facts are that the vast majority of lower income families do not save for their retirement for the simple reason that after paying tax, national insurance, council tax and general living costs there isn’t anything left. Clearly in this situation the lower earning half of the population - most of whom cannot afford to live without borrowing, let alone save - will opt out of NEST and we will be back where we started. It was this sector of society that NEST was designed to help.

And it isn’t just employees who are less than enthusiastic about NEST. The ACA survey found that over half of employers, some 53%, say the reforms will ‘add significantly to costs' and 29% say they are ‘likely' to level-down - reducing future pension contributions into existing and new schemes - to meet the additional cost of newly pensioned employees.

Email a friend

Email me when someone comments on this article Print

7 comments so far. Why not have your say?

Great argument with only one flaw. Since when has reducing someone's tax burden led to increased savings?

My guess is that most Nesters will still opt out and spend their increased income on a new LCD TV's and another holiday.

Mandatory enrolment with no opt out will be the only way these people will be encouraged to save, otherwise they will always find some way of spending the increased income (a more expensive house perhaps refueling the bubble). Given workers in the private sector have been enrolled in mandatory pensions for decades I don't why this should be a problem?

report this

Why does everyone go on about flat screen TVs as if they were like buying expensive cars etc. They aren't that expensive and they are getting cheaper!

report this

For many low paid workers who do not anticipate moving into a better pay grade it is not that sensible to save - they will get as much or more on benefits if they don't have a pension or money in the bank. I'm not sure that a bigger tax free allowance will change the situation. It is hard to know which is more distrusted, the government or the pensions industry, and for many the only proposition that would be trusted would be a high interest account or enough capital to buy a property, which is a big ask in most parts of the S.E. For this reason tax free savings like ISA's are much more attractive than pensions.

report this

So we give people a tax break and then take that back to buy a pension. Why bother? Just give the pension and lose the need for another Quango. Dosn't N.I do the same? This sounds like the rediculous policy of the tax credit system, one Quango to remove cash and another to give it back.

Luxury living on benifits is here to stay, replace the wine with tea and people will riot, worse still they will re-elect the Labour government.

How DID we win WW2?

report this

As ever the problem with pension saving is that to make a meaningful difference you need to create a large pension pot. Given current annuity rates you need to have a pot worth several hundred thousand pounds to generate anything like a liveable income. Most lower earners have no chance of doing it, I have even heard it said that unless you are on a salary of over £30K you might as well plan to rely on means tested benefits in retirement.

report this

Successive governments have raided pension funds, & pension funds having to be invested in the market means that those on the lower end of earnings scale have lost any enthusiasm for this particular product - imagine saving all your life, to be told at frequent intervals that your investments have not raised even half of what was predicted?

Those earning a reasonable wage do have disposable income, while those on low wages are unable to save at all - it is not an equitable situation, therefore it will not have any attraction for those who live hand to mouth because of government policies.

report this

Dennis .

Sep 28, 2010 at 13:20

Talking of trusting governments I saw that the government is already reviewing the incentives for green power generation which looked attractive as an investment for householders (solar cells on roof, windmills etc). They only came out last year and were supposed to be in place for 25 years.

Suppose the golden rule is don't get involved in anything where the governemt is involed (quite difficult actually)

report this

Please sign in here or register here to comment. It is free to register and only takes a minute or two.