Don't ruin our dreams
Iíve just been reading a particularly unsettling piece in one of our major national newspapers about the sad decline of private pensions in the UK.
It talked about the closing down of so many of our good company pension schemes; the overly-prescriptive annuity rules that seem to really wind people up and the need for radical simplification of a pensions system that has, quite frankly, lost the plot. It went on to talk about the possibility of further compulsion to get more money into pensions and the fact that young people just donít seem to be interested in pensions any more.
It was full of facts and figures and depressing statistics - you know the sort of thing - and, to be honest, it left me feeling a bit fed up. Sort of - it all looks a bit too gloom and doomy, like the whole thingís going to hell in a handcart and weíd may as well all give up on it and what's the point? Well, thatís not in my usually over-optimistic nature so I thought: ďI know - Iíve got to write my Bloomberg Money piece, so why donít I just put the record straight on all these things? I'll cleverly refute all these points and put over an upbeat message. Brilliant idea!Ē
Now, what you wonít know, because youíre reading this in a magazine - and that means itís already been written or you wouldnít be able to do that - is that since I wrote that last paragraph Iíve been sitting here staring at my computer screen for the best part of an hour and a half wondering what the hell I can write next. To tell the truth Iím struggling, because the more I think about it the more I think we are reaching a crisis point in pensions in this country.
It is true that final-salary pension schemes, the best type of pensions in my opinion, are closing down at an alarming rate. Nothing like this has ever happened before and itís something we probably should all find worrying. The reason for the closures seems to be a mixture of issues relating to complexity, cost and accounting requirements.
It is also true that pensions are getting more and more difficult for people to understand and to some extent it is therefore inevitable, I suppose, that people will go off of pensions a bit if the confusion continues to get worse. Nobody is likely to remain interested for long in a system they simply canít understand.
So itís not that easy at the moment to paint a rosy picture for pensions, if Iím being honest with you. And then, as if thatís not bad enough, weíve now got all of these extremely worrying rumours running around that the government is considering doing away with the tax-free cash we get from our pensions. I sincerely hope thatís not true and rather just an unfounded rumour. Iím not being funny but, without the tax-free cash pensions would not be particularly appealing.
When we put money aside for a pension we are doing the country and our Government a big favour. We are acting in an extremely socially-responsible way by ensuring we can live off our own means in retirement. When we do this our money is, to some extent, taken out of our control. We canít get hold of it until we retire. In some cases that could be 30 or 40 years hence. A long, long time!
When we do get to retirement we are then obliged to invest our pension savings into something called an Ďannuityí that gives us a regular income for life. This makes sure that we do in fact provide for ourselves for the rest of our lives after retirement and we donít just blow the money, thinking 'to hell with the consequences'. This is all a bit prescriptive and more than a touch nanny-state, but, by and large, people are happy to go along with it because some of our pension savings (about a quarter, in fact) can be taken at retirement as a cash sum which is tax-free. And thatís worth having and, particularly, worth waiting for.
It gives the right balance, I think, between the socially-responsible behaviour of long-term saving and the understandable human desire for control over oneís own destiny. Having a large slab of tax-free cash at retirement - and the more we save the larger the slab - allows us to have our dreams. That special holiday, that breaking-free from the debts that plague us, that being able to treat our family to something special, that you name it, whatever it is that we all like to dream about while weíre busy being responsible adults and going without while we are saving.
Removing tax-free cash from pensions would be removing the dream that keeps us going as savers when the going is tough. Letís hope itís removal is just a rumour and that no government will ever be daft enough to ruin our retirement dreams.
First published in Bloomberg Money, November 2002