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Should pensions be a locked box or allow access?
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Auto enrolment may miss the opportunity to kick-start long-term savings
Dr Ros Altmann has warned that we cannot just rely on pensions to solve the pensions crisis. It is no longer enough for individuals to expect the state, their employer or even private pensions, to guarantee to support retirement lifestyles. Taking personal responsibility for planning later life income, regularly reviewing these plans and considering how to combine both our financial and human capital was recommended. Dr Altmann, Director General of Saga Group, speaking at the 2012 Crowe Clark Whitehill pensions lecture, emphasised the necessity to focus on lifetime savings of which employer or private pensions are only one aspect. She believes that auto-enrolment is missing an opportunity to broaden later life income planning beyond just pensions and suggested that workplace savings should allow investments in ISAs as well as the traditional pension 'locked box' product.
To encourage increased personal pension contributions, Dr Altmann suggested allowing partial access to pension savings. She recommended that contributions by employers and the associated tax relief could be locked, while individuals could be granted access to the rest i.e. their own contributions, at least at times of significant need such as for a house deposit or paying off student debt.
Phil Smithyes, Managing Director of Crowe Clark Whitehill Financial Planning Limited said: "Advancements in medical science and improved health mean people are living longer and therefore need more money to see them through their extended retirement. The combination of increased longevity, coupled with historically low interest rates and bond yields, means that individuals suffer a 'double whammy' effect with the cost of purchasing retirement income being double what it was 10 years ago.
"Individuals need to work with their financial planner to map out their retirement provision. It is fair to say that moving forward, the onus is firmly on the individual to fund their retirement rather than relying on the state. Focusing now on structured planning and appropriate investment strategies, will help lessen the burden later in life."
Crowe Clark Whitehill started a pensions lecture series nearly 20 years ago aimed at exploring the underlying issues affecting the direction of the sector. Thursday 3 May 2012 saw the annual lecture resurrected with Dr Ros Altmann presenting "The pensions crisis - funding old age". She examined not only the monetary issues facing the future of pensions and retirement as we know it, but also the social aspects such as expectations and understanding of both pensions and retirement. She also cautioned that retirement income planning needs to factor in the costs of care, which have thus far been ignored in the pension and retirement income planning debate.
Dr Altmann suggested western societies are on the cusp of a social revolution, which encompasses a rethink of the concept of retirement. Savings products, alone, cannot be relied on to support increasing numbers of people living ever-longer lives, unless our expectations of retirement change. This means embracing a whole new phase of life - which she calls 'bonus years' - that is a period of part-time work, after a full-time career, as 'retirement' becomes a process, rather than an event, with a more gradual move into full time retirement. She claims that the current trajectory results in an unsustainable shift in the ratio of working and non-working years in today's society, with more than half our lives spent not working. By contrast, in future, individuals living into their 90s might typically spend their first 20 years not working, 40-45 years in full time work, 10-15 'bonus years' in part work/retirement and then around 20 full years retirement. This shift means individuals can plan their lives differently and embrace new opportunities that break the old social norms. Dr Altmann also advocated that consideration should be given to abolishing the word 'pensions' other than in the context of State Pensions, to differentiate clearly between the social welfare element of pensions and the private long-term savings function. This would help overcome some of the negative connotations associated with pensions, after past scandals and help encourage more flexible planning of individual or workplace savings and later life income sources.
Dr Altmann added: "Let's face it, many people have lost faith in traditional pensions. What is really important is to recover the culture of long-term saving and broaden our thinking so that later life income can include products other than just pensions. Combining pensions with other forms of saving, including for later life care needs, as well as earnings from part-time work, will help people afford a much more comfortable life in old age. People are not 'old' at 65 or even at 70 anymore and most cannot save enough to provide a decent income for 30 or more years of retirement, so let's redesign both pensions and retirement, rather than wasting so much talent and resource with old-fashioned thinking."
Click Here to view powerpoint slides used in the presentation
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