Key findings of Hymans Robertson’s research:
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Only 23% of people feel in control of their pension
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Taxing payments into pensions will act as a disincentive to saving
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Consumers favour the status quo and value tax free cash, not just to access cash but also to act as a brake on spending in retirement
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68% said fewer changes to the pension system would encourage them to save more
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The majority are supportive of building on the success of auto enrolment with small automatic increases to contributions to encourage more saving
Commenting on the findings, Chris Noon, Partner at Hymans Robertson said:
“What is clear is that people feel a lack of control over their pensions. This contributes to ‘rational ignorance’ – in other words savers feel it’s pointless to try and understand the system due to Government changes. This helps to shine a light on why financial education efforts largely fail. People resist education as they feel there is no point as the system will change and their efforts will be wasted.”
The survey found that only 23% feel in control of their pension. When asked why they don’t feel in control, 64% said they don’t know what income they’ll get when they retire and 48% said it’s because the system changes too much. Over half (53%) lack confidence that the Government won’t change the tax treatment of pensions before they retire and 37% feel there is no point in learning about pensions as the rules change all the time. When asked what would make them feel more in control, 39% said a long-term plan for pensions from the Government, 39% said fewer changes to pensions by the Government and 34% said clearer communications from Government in relation to their pension.
Commenting Chris Noon added:
“In light of these findings, it’s clear that implementing a huge change such as a shift to a Taxed Exempt Exempt (TEE) pensions system will not strengthen the incentive to save – quite the opposite. We already have trillions invested in the current system. A move to TEE will result in either the complexity of a two tier system for past and future pension saving, or a transitional ‘tax raid’ on past pensions. It’s difficult to see how this could possibly act as an incentive to save, particularly when only 23% of UK savers feel in control of their pension and almost half (48%) don’t feel in control because the system changes too much. Instead, it’s likely to contribute to a lack of consumer confidence and engender more distrust of future governments making further changes.”
Aside from the issues of lack of control and disengagement due to complexity and constant changes, the focus groups also found that people saw the removal of tax relief on contributions as a disincentive to saving. This was for two main reasons. First, they were worried about paying more tax ultimately as they could be in a higher tax bracket when earning than retired. Second, they were worried that this would result in a drop in take home pay if they wanted to keep contributing the same amount to their pension. When we asked what acted as incentive to save through the online survey, 68% said tax efficiency.
Noon concluded:
“On balance savers prefer the status quo as changes to the system make them feel vulnerable and add to a sense of a lack of control. People also value and are very enthusiastic about the tax free cash lump sum – a tangible benefit they don’t want taken away. They value the ability to take some cash at retirement, but they also value the fact that it’s not all ‘tax free’ as it acts as a brake on spending.
“The fact remains that the majority of people in the UK are going to be disappointed when they reach retirement because they are not saving enough. Freedom and Choice in pensions, which allows people to access pension savings from age 55, could exacerbate the problem.
“At one end we need to incentivise saving and look at measures that will help bridge the savings gap. To that end a policy area that the Government should consider, which builds on the success of auto enrolment, is automatic escalation. 59% of those surveyed are supportive of small automatic increases to contributions to encourage more saving. At the other end, we need to dis-incentivise too much spending. If all pension payments were tax free, this makes taking more cash and potentially spending it even more likely, ultimately placing greater strain on the State.
“We strongly caution the Government against a move to TEE and instead recommend modifying the current system of Exempt Exempt Taxed (EET) by introducing a cap on the rate of income tax relief. This would achieve the Government’s policy objectives with much less cost and complexity.
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