Should people be saving more for retirement?

Paul Johnson

Welcome to this edition of the IFS Zooms In, and this week we’re going to be talking about pensions and savings for retirement which, before you switch off, really is a very exciting topic. Particularly exciting because I’m joined today by Claer Barrett who is the consumer editor of The Financial Times and the host of the FT’s Money Clinic podcast, as well as Carl Emmerson who’s deputy director at the IFS and an expert of pensions, and they will be coming at this issue of saving and pensions from their own probably rather different perspectives. Claer from the real worlds as it were of people making actual decisions in the face of the acts and behaviour of the financial services industry, and Carl who has looked for years at pension policy and in data sets looking at what people actually do with their pensions savings.

We would probably start with a disclaimer that this is not to be taken as financial advice, we at the IFS conduct research into pensions and savings, and Claer, knowledgeable as she is, is not, I think, a qualified financial advisor, so don’t take this as advice, but do take it as important information as you think not just about pension policy but your own pensions.

We’re going to focus mostly on people who are currently saving for their pension, rather than the current generation, but perhaps we will start with the current generation because I think - the current generation of pensioners as it were - so I think one of the important contexts here is that pension savings for those of us who are not yet too close to pension age will be very different from those who are already receiving their pensions. I’m going to start with Carl, perhaps you can just give us a little background on the facts as to where pensioners today are in terms of how well off they are and how successful they’ve been in their investments and savings?

Carl Emmerson

Thank you, Paul, and if you look at today’s pensioners I think it’s fair to say that on average, their incomes look really quite high relative to the working age population. Now that’s on average, of course there are poor pensioners, there are also some very rich pensioners. But if you take the pensioner in the middle of the pensioner income distribution you, and look at their income after paying housing costs and of course many pensioners own their homes out right, so they don’t have any housing cost, actually, that person has an income that’s pretty comparable to the average, after housing cost income, of the person in the middle of the working age income distribution. So, on average pensioners no worse off than the working age population in terms of their incomes.

And that’s quite remarkable because actually we tend to think in retirement people will have lower incomes than they do when they’re working, their costs may will be lower, they don’t commute anymore and they may not be supporting children financially, so there’s many reasons why to think their incomes on average should be lower. But actually, today’s pensioners, and that’s not the case, they’re in fact on a par with the working age population. And I think there’s good reasons to think that todays working age populations won’t be able to get to that level of replacement rate.

Paul Johnson

And Claer, what does it look like from your point of view, and when you’re thinking about the choices that people have when they get to pension age?

Claer Barrett

I think that the choices that people have once they get to pension age now, are much, much more complicated than they were a generation ago, just because of the mixture of different ways of saving into pensions that most people who’ve worked for more than one company will end up having. And overlayered onto that there’s the tax complexity and the advice gap problem.

So, to give you an example, one of our readers, Rod, who is coming up to the age of sixty, emailed me – lots of the readers email me and I love it because it gives me access to problems that I’m not rich enough to personally experience and then work through with people who are qualified to help, in this case some specialists pensions advisors. So, Rod’s issue, common to many, is that he’s got a combination of a defined benefit pension, otherwise known as a final salary scheme, they give you a guaranteed income for life until you pop your clogs. And they’re treated very differently in the tax system to the other sort of pensions the rest of us have, defined contribution, or DC money purchase, where you build up a pot of money and then you spend it in the time but it ultimately is exhaustible. So, he was facing the bigger question of how does he make his money last throughout his retirement, because a problem for everybody there is that you don’t know how long you’re going to live for.  

But the second one is if he took any money out of his defined benefit pension scheme, it would trigger a set of tax consequences for the rest of his pensions savings. In effect like every move you make when you start to take money out of a pension, will have a tax consequence somewhere else. For people who’ve got both types of scheme, that is complicated, but even for people, the Rods of the future if you like, who are going not have a combination of a SIPP, a self-invested personal pension, a couple or maybe even more DC pots from different periods of employment, plus the state pension, any other cash savings they’ve got, equity release from a property, it’s working out the sequence that you’re going to take all of those things, the tax liabilities and ultimately what you want to leave behind for your heirs. And we’re find that enormous numbers of FT readers are leaving the pension until last, this is what the wealth advisors are telling them, because the tax treatment on pensions after death is much more favourable than other assets such as savings in ISAs, another popular form of retirement funding, and so people are kind of burning through those first looking at selling off other assets like buy-to-let properties before they touch the money in pension. So, for the wealthiest at least, the pension problem is having too much, but for the rest of us, the pension problem is very much having too little.

Paul Johnson

Well that will be a nice place to be in, to have too much. Perhaps we should talk later about the fact that I’ve got a little bit of civil service pension which I think kicks in without choice when I get to sixty; I don’t know what that will do to other bits of my tax affairs. And I can’t help but just repeat what you said about this totally bonkers way in which pensions are treated for inheritance whereby personal pensions become the most, essentially the most tax efficient vehicle for leaving money to your heirs, that’s not what pensions are supposed to be about, it’s a completely absurd tax loop hole, and I’m using that language which I don’t normally use quite so strongly because it seems to be wholly indefensible to be able to leave pension pots exactly as Claer was describing as the last thing you draw on because it’s the most tax efficient way of leaving things to your children. Absolutely mad. But let’s – listeners can’t see this, but Claer is nodding furiously as I-

Claer Barrett

I’m glad that I’ve managed to lower the tone of the IFS podcast, but yes, you’re right it is utterly bonkers.

Paul Johnson

Well, we are agreed on that. But let’s, move on, so we’ve got this complicated world for people who are reaching retirement at the moment, many of whom are in this transition generation I suppose as Claer was saying, they’ve had some defined benefit pension, but perhaps the latter part of their working lives is in the defined contribution or money purchased or personal pension. But they’re still better off almost certainly as they approach pension age than the, than the younger generation. Perhaps, Claer, we could start by just asking you, I mean in terms of that younger generation, how should they be thinking about saving for retirement, lets go a few decades down, people in their twenties and thirties, should they be shovelling money into a pension at the moment?

Claer Barrett

So, there’s many good reasons to put money into a pension if you are young, obviously the younger you start the longer your money has got to compound. You’re employer will match the contribution, the so called free money, so that’s boosting the size of the savings that you’re putting in, which can then grow tax free over time, and of course you don’t pay any income tax and in many cases National Insurance on the money that you’re paying into the pension - you will pay a little bit of tax on it when you come to take it out but all in all, it’s a brilliant deal, if you can be tax efficient and use salary sacrifices to put more of your income in there then the benefits can be potentially even greater.

The problem is for young people is number one: retirement seems a very, very long way away. Number two there are lots of competing demands for our cash now, buying your first property, having your first child, often the two are linked. The age that people are able to achieve both, on average in this country, is getting older and older. So, do you sacrifice pension savings for a period of time in order to get on the property ladder, or in order to bring up a family, and then try and accelerate it further on in life? Now, if you take me as an example, I prioritised buying a property when I was young, I didn’t save into a pension at all until I joined the FT by which time, I was nearly thirty. But I had got on the property ladder, and for me that strategy has paid off because property prices have tripled or maybe even quadrupled in price since those days, so I’ve ended up with quite a valuable asset and I’ve managed to catch up on pension savings. But people today who are buying into the property market, are they going to see that level of growth? I doubt it. And at the same time, they haven’t got money in the pension compounding away for the future either, and there’ll be a longer period of time before they can pay off all of the mortgage debt that they’ve had to take out, even if they have had some help from the bank of mum and dad, so they won’t necessarily be mortgage free in retirement like todays pensioners are.

So, all in all, it’s a bigger struggle and there are lots of difficult choices that young people are having to make. If they are in a great, privileged situation, then they’ll be able to do both pension and property, likely because I expect their parents are able to help them with the property bit. If they are in a still fairly good but less privileged situation, they will be able to prioritise one or the other, property or pension, either/or. But if they’re not in a great financial situation then this is what really troubles me, the answer is going to be neither. They’re not going to be able to save up to buy somewhere to live, so they’ll have those high housing costs throughout the rest of their working life and retirement and they’re not going to be able to have any private pension savings to tide them over in the future either, the only thing they will have is the state pension.

Paul Johnson

A lot to pick up on there, Carl, I think from some of the work that we’ve been doing that looks at exactly some of those issues Claer’s mentioning about the lack of income among the younger generation but also the choices they may have to make between housing and pensions. But also, some results that I think came from some of your work which I think some people will find counter intuitive which is actually that maybe it’s not such a bad thing leaving your pension saving until later in life?

Carl Emmerson

Indeed, one of the difficulties we have when we, if you talk to a younger person and try and assess whether they’ve saved enough for retirement is that it’s actually quite hard to answer the question how much should they have saved or should be saving. And that’s because actually a lot depends on what they expect to happen in the future, how they think their incomes going to evolve, how they think they’re spending needs are going to evolve. Some colleagues constructed a relatively simple economic model and put some of the key features of the policy and economic environment into that model to ask the question, “well what does this model predict about behaviour?” And if you took a young graduate, yes Claer’s right, if they’re employers placing some matched saving in, that’s you’re automatic involvement, the model was suggesting they should save enough to get that employer match, get hold of that free money. But it was actually suggesting that over and above that, there were good reasons to really hold off on any pension saving, particularly if they were very confident that they were going to get earnings growth in the future.  

And the model was suggesting that perhaps as much as 80% of their pension saving should perhaps come in the second half of their working life, and in particular be geared to years when their student loan would have been paid off, would have been written off, perhaps to years when their children were less of a financial burden on them, and perhaps to years when they’ve finished paying off that mortgage. Now that model won’t be right for everybody and indeed people who don’t expect such strong earnings growth or indeed people who are much more uncertain about the future might want to save more, and indeed they might want to save more but perhaps not put it into a pension.

I think the other thing to remember here is that whether someone who should save is a slightly different question to about whether they should put the money and lock it away into a pension. So, to give another example, if you’re under forty and you’re self-employed, should you be putting money into a pension? Well actually the lifetime ISA would give you an upfront match on your saving, the money would be more flexible, it would allow you for example to access the funds to use to purchase a house, and when you get to sixty you can get hold of the funds anyway and maybe you’d want to move the money into a pension at that point. So, for younger people I think it is a complicated story, it’s certainly I think not clear cut that people should be saving more in a pension over and above to get any employer match, but that’s all conditional on this world where yes they do then put lots and lots of money in a pension later on in working life. If they don’t feel they’re going to be able to do that, I think the story could look quite different.

Paul Johnson

And I think I’m right in saying, Carl, aren’t I, that when you actually look at people’s behaviour and you really do see the people start saving like crazy in their fifties once the mortgage is paid off and the kids have gone and maybe their earnings are reasonably high, that is for lots of people when the savings really do start to pile up?

Carl Emmerson

I think it’s when the capacity to do more saving looks like it really piles up. Actually, when we look at saving rates over time, we tend to see people when their earnings go up, yes, they save more, but it’s the same percentage of that higher earnings, they don’t seem to ramping up the contributions very much. So typically, over the lifetimes, we see savings profiles looking much, much flatter than perhaps what our economic models would suggest that they should be.

Paul Johnson

And Claer, what’s your experience of that. I mean do you find from your interactions with your readers that people get a lot more interested in savings and pensions and so on as they get towards pension age?

Claer Barrett

Oh definitely, every single financial advisor I know, including my own says that people are more likely to come and make an appointment for the first time on a landmark birthday, typically fifty because that’s when we find it sort of starts to hove into view. But increasingly later, maybe fifty-five, when the pensions freedoms allow you to access your money or even sixty as people think they will be working for longer. So, the biggest problem with the excellent suggestions in Carl’s research, of having this flexibility to save more in later in life, or at different stages, are the tax rules they’ve put in to govern how much we can save and when into a pension. The annual allowance which has come right down to £40,000 a year for most people, and the lifetime allowance which is just over a million pounds. Now, with the annual allowance, I said for most people it’s £40,000, but if you are somebody who earns a lot of money, you know we’re talking well into the six-figure salary, that allowance is whittled down and whittled down, and whittled down to a floor of just £4,000 a year that you can put into the tax shelter of the pension. Now that is kind of a bad thing, but the worst thing is administrating it, you have to kind of get your crystal ball together and predict what you’re earnings might be in the forthcoming tax year, it’s very, very difficult, we get a lot of interaction from readers about the annual allowance taper and the nightmare of working it out. And many of them describe themselves as being capped out of pension savings: they can’t save a meaningful enough amount of money once they do hit the stride of their higher earning years. So, they have to use alternatives, the ISA and the lifetime ISA for the under forties, two brilliant alternatives but again, £4,000 then £20,000 a year are the caps for those. And the other trend that I’m seeing increasingly in the last few years, is for kind of people, it used to be the very wealthiest people, finance, city workers, who have used these kind of extreme tax efficient saving vehicles such as venture capital trusts or enterprise investment schemes where you’re given a large tax break for investing in very, very risky start-up companies which could succeed or fail. But increasingly it’s the doctors, the dentists the head teachers who are capped out of pension savings and looking at these risky yet tax efficient ways of saving for the future, and how that will all pan out, I don’t like to think.

Paul Johnson

Yes, it’s been a remarkable journey the way in which pensions and other savings are taxed. There was a big change in the late 2000s which was supposed to simplify everything in pensions, allow the quite a lot, I mean really substantial sums to be saved tax free. And then over the years, particularly with the coalition government but since 2010 we’ve probably, I think I’m right in saying that the second biggest tax rise overall, has been the reduction, at least until this year, has been the reduction in the effective amount that one can put into a pension, such that certainly for higher earners as Claer was saying, they can now put more into an ISA than into a pension.

Carl, it may well be that a lot of people are listing to this and listening to what Claer’s saying and saying, quite right too, I mean why on earth should people, particularly people with high incomes be able to save money in a pension free of tax when the rest of us are paying lots of tax on our income? And if you look into the HMRC numbers it looks like this tax break is costing us tens and tens of billions of pounds a year. Isn’t this just a good thing that the government has clamped down on it?  

Carl Emmerson

Well I think where the tax system is generally generous to people I think it’s pretty reasonable that the government puts a cap on that generosity and tries to ensure that it’s generosity is really being targeted at the people it wants to target it on. I think the problem is actually having a pension system where essentially you put the money in from your income before tax, and then you pay tax on all that money when you get it out again, that’s not particularly generous, that’s not the generous part of the system. For me the generous parts of this system are the inheritance tax treatments that’s we spoke about, the tax free lump sum where I would question why somebody who’s got £900,000 in the pension should be able to save money in that pension and get more tax free lump sum as a result. And the National Insurance treatment which Claer mentioned which again is very generous for people who can get their employers to make contributions on their behalf. So, I do think, you know, pensions are generously treated, and I think there is a good case for making that treatment in some places better targeted, less generous for some. But I think we’ve gone about it the wrong way, it should be things like the tax-free lump sum, the inheritance tax treatment plus the National Insurance treatment that we should be looking at, and thinking, “are they well targeted? could we spend the taxpayers bucks better there?”

Paul Johnson

And the point about the tax relief we normally talk about, as you say is essentially that whilst you get tax relief on the way in, you do have to pay tax again on the way out, and so some of these numbers which are associated with the cost, which don’t take account of the tax on the way out or are a bit overblown. And indeed, pension saving essentially gives you an opportunity to spread the cost of the tax over your lifetime.

But what do we know about what’s actually effective in changing people’s savings behaviour? I mean Claer when you talk to financial advisors and talk to your readers, what actually makes a difference to their behaviour, is it the tax? Are there other things particularly one could do to encourage people with perhaps lower incomes and lower than perhaps the average FT reader has to save more?

Claer Barrett

Well definitely that carrot of tax relief. Because the basic rate tax payers, people who earn up to say the £50,000 a year, which is not an inconsiderable sum, they are the ones really who are disadvantaged with pension savings because they get less tax relief, because they only pay 20% tax. We get, higher rate payers, 40% because we pay more tax. So there have been arguments in the past that there should be a flat rate of pension tax relief so everybody gets the same amount of tax relief and thereby it removes the perverse incentive that those with the most money to save the most into their pension. And if you think about it from the point of view of fairness that, to me, would seem a better system, because it’s more likely to make more difference to people who are on lower incomes, working people. To have a greater buffer to incentivise them more, to build that buffer of private pension savings so that they’re not reliant on purely the state pension when they retire as I fear an awful lot of people are going to be.

Now as soon as you start working in a professional job, you quickly become aware of the benefit, and companies, it has to be said, are getting much better at selling the benefits of pensions with the workplace. But ultimately, one group of people that Carl mentioned are left out in the cold with all this, which is the self-employed. Now as the gig economy gets bigger and bigger and as kind of sneaky forms of self-employment become more a feature of the job system, I’m talking about umbrella companies, so called PAYE freelancers, they’re an awful lot of people who are excluded from auto enrolment, from the company contribution, and for them, if they are going to start saving into a pension, the incentives to do so are even lower. So, if we’re talking about how we can get the most bang for the taxpayers buck in the future, they are the kind of groups of people who I think really deserve to be encouraged with that carrot of saving more. The Lifetime ISA has gone part of the way to fill that gap, it’s a very useful product for self-employed people who are under the age of forty, but in many other respects which we don’t get into on this podcast, it’s a terribly designed product with an awful lot of rules that can trip up the unwary and the kinds of people who are getting those products are definitely not the sort of people who can afford to take financial advice.

Paul Johnson

So just, so not, so we’re worrying about that, exactly what are the things that can trip you up?

Claer Barrett

The problem with the Lifetime ISA is that once you have put the money in, if you want to get it out for any other reason than to buy a property or to access after the age of sixty you actually pay a penalty which is more than the 25% bonus or interest that you’ve accrued, there’s a penalty built into that on top. So, you could actually end up with less money than you started. Now some people might say, “well that’s actually better than the pension, because when you put the money into the pension you absolutely can’t get it out no matter what, so at least you could access the funds in a crisis, even though you would lose part of it.”

Paul Johnson

Well indeed, its actually it’s been interesting seeing one of my sons thinking about savings and be completely baffled by everything around the lifetime ISA and him putting his money into an ordinary ISA because it all seemed very much too complicated for him, I think quite rightly.

Claer Barrett

My son has done exactly the same.

Paul Johnson

Carl just from the economics literature and analysis and evaluations that you’ve done, what do we know from that about what actually, government can do to persuade us to save more?

Carl Emmerson

So, we know that financial incentives really matter but they matter, we think, much more for where you save, rather than how much you save, so of household wealth in the UK, something like 80% is in owner occupied housing or pensions and it’s perhaps no coincidence that they’re two things that are particularly tax advantage relative to other forms of saving. So, if the government wanted to invent some kind of vehicle, like it did with the Lifetime ISA, if it makes it attractive enough, lots of money will appear in that vehicle, questionable how much of that is really genuinely saving rather than just saving that would have happened anyway, perhaps just savings that are being moved from one source to another. But government can certainly manipulate and use financial incentives where savings go.

The other type of intervention that Claer mentioned a moment ago that has had really quite big effects on the pensions environment in the last decade is automatic involvement. So back in 2012, about one in three private sector employees were a member of their employer’s workplace pension, that has been declining overtime. We then gradually rolled out this policy where for most employees the employer has to enrol you into the pension scheme, has to make a contribution of at least a minimum amount, deducts a contribution of at least a minimum amount from your salary and you as an employee can then choose what to do, you can quit the scheme, you can change your behaviour in other ways. And that’s had a huge impact on pension coverage. Amongst the groups who are eligible, it looks like you always get coverage approaching about 90% in these schemes. So much, much bigger than what we were seeing before, it’s a remarkable turnaround in terms of pension membership.  

But I think still some open questions, I mean the minimum amount an employer has to put in and has to deduct from your salary is not that great, so there’s question marks about whether that’s the right number. And we know lots of people who were brought i to schemes via automatic enrolment end up contributing what it is the employer sets, they end up in the investment plan the employer sets, they end up with the employer and the employer contribution that’s been defaulted in, rather than making an active choice. So, there’s big questions about whether those should be changed going forwards. We also again don’t really know how much of this is genuinely new saving as opposed to money that would have been saved in some other form. Although there is evidence from other countries that suggest actually much of it probably is new savings which would be very welcome to those wanting to use these kinds of policies to induce grater retirement saving.

Paul Johnson

Just finally, we’ve been talking about quantities of saving, and we’ve been talking about incomes in retirement, but how these two relate to one another is changing, isn’t it? I mean if you have had as very few people now do, one of these traditional defined benefit pensions schemes, you would have saved a certain amount and your employer would have put a certain amount in and you’d know pretty much what you were going to get as a pension, and if things went badly for the fund you’d still get that pension unless your employer and the pension fund itself went bust which happens occasionally but not very much. We’re not in that world now are we, for two reasons, one is that the money you put into, whether it’s an autoenrollment pension or some other form of defined contribution pension, you don’t know how much you’re going to get out of that, it depends on interest rates and what happens on the stock market and so on, and interest rates at least are much slower than they ever used to be. And secondly, you don’t actually get a pension because you’re not buying an annuity at the end you’re certainly not forced to and most people don’t, you’ve just got a pot of savings. So, Carl what does that tell us about the risks that people are running with savings and indeed what do we know about the possible consequences of these extraordinary low interest rates that we’ve had for such a long time now?

Carl Emmerson

I mean taking the second first, I mean the very, very low interest rate environment and essentially the fact that you’re saving in a defined contribution pension and not in a defined benefit scheme which effectively was offering very, very high returns mean that essentially retirement incomes have just got more expensive, relative to working age incomes. So, to achieve the same kind of retirement income now, you’re going to have to do a lot more saving than you would have had to do in a world where interest rates, the effective return people could get remained high. And indeed, if the price of something goes up, you might want to buy less of it, and that’s one reason why todays working age population might not want to essentially get to the same kind of levels of income replacement that recent retirees have been able to enjoy. It just might be too expensive in terms of how much spending they’d have to give up in their working lives to get there.  

But as you suggest this is not just about the level of income that people are getting, it’s also very much around the risks around that income and how people manage it. So people have got to make investment decisions as they accumulate their pension right up to retirement, individuals are exposed to the risk of those investments being bad ones, perhaps because they’re unlucky or they make bad judgments with their investments, people who are in defined benefit schemes in the past didn’t have to worry about that, and then when you get to retirement, that’s not the end of your decisions, you don’t just buy an annuity and then that’s your income fixed, you’ve got to manage that pot of money, presumably manage it down through your retirement, thinking about how much you want to leave to your heirs, if you do want to; thinking about, you know how much you want to spend early in your retirement when perhaps there’s certain things you want to go and do; how much you want to leave aside for later in your retirement, and how much you worry about the possibility that you might live a lot longer than you expect and you don’t want to run out of money. So, managing all of that is very, very difficult. It’s going to be very difficult for somebody at the start of their retirement. I guess I also worry it’s also going to be very, very difficult for people as they move much further through their retirement, which is not something we’ve seen yet. Those pensions freedoms came in in 2015, it’s going to be while before we get to see how well do, for example, ninty-year-olds manage the decumulation of their pension pots over the remainder of the lives.

Paul Johnson

And Claer, can I end up by asking you about the particular issue of choices over annuitisation, I mean what do you do with the pot once you get to sixty, sixty-five or seventy whenever it is that you decide that you’re going to start relying on your pension, lets ignore this nonsense about wanting to keep it for inheritance, how do people make a sensible decision about how to manage that pension pot post retirement?

Claer

Well in response to that Carl said, it used to be that financial advisor’s kind of waved goodbye to their clients once they kind of hit retirement age, took the tax free lump sum, used the rest to buy an annuity, that was it, you know they had that secure income for life going forward. Now there’s changes that we’ve seen that prompted the move towards pension freedoms where nobody had to buy an annuity unless they wanted to, of course were prompted by wider changes in the financial market, and the fact that the amount that you can buy as an annuity is far, far less nowadays. The alternative is what’s called drawdown. So, you leave your pension funds invested in the stock market, and you draw down a certain percentage of incomes from those investments over time. Now if you adjust the percentages, so if we had seen big falls in the stock market, you’d take slightly less income, if the stock market had some good years you’d perhaps take slightly more, that is how you manage the pot without, hopefully, exhausting it by the time you are exhausted. But of course, you need the help of an advisor to do that throughout. So, in one way, great for the advisory profession because they can now charge you a fee every year, but it’s completely changed the way in which we manage our finances in later life. 

And a couple of recent cases that I’ve been reading about in the newspapers, also involve capacity issues. If people live for longer, they’re in charge of their estate, how long can they go on doing that for, managing their money before they have to pass that over to a younger relative to try and help them and do so in a way that’s not going to cause problems? So there’s an awful lot to think about, add to that the tax limits and the potential tax traps that retirees can trigger, depending on which parts of which pension they can take when, there are all kinds of hidden bear traps waiting to catch out retirees and the pension system which should be in the sense gloriously simple, put more money aside today in order to provide for tomorrow, suddenly becomes nightmarishly complicated. The problem with that of course is if things get too complicated then people are just going to put it in, you know, the proverbial draw at home where we put all of the paperwork from pension providers and the like that we are baffled by upon first reading and we think, “well we’ll get around that that at some point. People are just going to not make decision about any of this stuff, they’re just going to say it’s too complicated, I can’t deal with that now, and then the consequences in the future are really worrying. So, we need to make things simpler, give people clearer choices and think very hard about how we incentives those who really need to save for retirement but are not saving now.

Paul Johnson

Sorry I was going to end there but I mean this is just too interesting, what actually could you do? I mean what would you do if you were to do one or two things which would really make this simpler?

Claer Barrett

In the bigger, bigger, bigger picture, the FT has set up a financial literacy charity called the Financial Literacy and Inclusion Campaign, because we think it’s appalling that there’s nothing on the school curriculum, the university curriculum, financial education, also learning can continue within the work place, but there’s nothing that mandates young people have to be taught about money. And when the risk is all on you, which it is now, with pensions and retirement, we should be teaching people about how this stuff works, and we should be teaching vulnerable groups, young workers, more about how their money and the decision that they can make today are so important for tomorrow. But that’s really, really bigger picture stuff.

In the short term, I think that at some point, a future government, probably not this one, is going to have to tackle the issue of pensions tax relief and how fair it is. I know that FT readers up and down the land will be groaning if I say that you know we shouldn’t get these benefits as higher rate and additional rate taxpayers, but we shouldn’t, there should be a fair system and it should be more equitable to people further down the food chain who need to put more money into retirement savings now.

But the bigger problem with all of this is trust in the system. Now with long term savings products, like pensions, if you change the rules, this is where successive chancellors keep tweaking the rules, just a little bit. If you change the rules, people get very annoyed because they’ve made decisions for their future decades away based on what the rules are now and they don’t want to see the rules changed in a way that could penalise them in future, they get very, very upset. So, we can’t shy away from the fact that reforms need to be made, because if we keep putting off this decision, if politicians keep putting off the decisions, then they’re passing on the problems for the future, and I think that one of the reasons that chancellors in the past have failed to really grasp the nettle with pensions is because they know that if they do make any big changes, it could be unpopular with the electorate, the result of those changes are not going to be known until, you know they maybe six feet underground in some cases because of the huge amount of time it takes people to save for retirement. And in the same way, the lack of decent policy that we have had and the big risks that have been taken with pensions freedom with allowing the mass market to access previously high-risk products that you couldn’t buy without an advisor, like drawdown, we’re not going to find out the consequences of those policies until many decades into the future. So, it’s quite a dangerous game that we’re playing with the pensions. But the one thing we do know is that if people who have less money are encouraged to save more, that’s got to be a better result overall than encouraging those with the most money to get more in.

Paul Johnson

Well thank you, I mean I have to say that wasn’t all terribly encouraging in terms of you know people wanting to put money into the pensions. At the end of that, I kind of feel it’s all much too difficult and I really will put my money under the bed. And the, and I think that is part of the unintended consequences of what has become an incredibly complicated system. But as you say Claer, one thing is for sure, the financial advisors are going to be doing very well for a very long time as they, as they try and guide the rest of us through this maze of regulation tax law and complexity.

So, thank you Carl, thank you Claer, for a fascinating discussion of pensions both public policy and how we should think about it as individuals making our own savings, so to repeat the warning at the beginning this is not constituting financial advice of any kind.

We’ll be back with you in a couple of weeks, in the meantime thank you for listening, if you enjoyed this episode please subscribe and rate us and share the podcast. And to see more of our work do visit www.rfs.org.uk. And if you do want to further support the IFS you can become a member for as little as £5 a month, not much in the context of what you might need to save as a pension, and you can find more information in the episode description.