Cookies on Pinsent Masons website

This website uses cookies to allow us to see how the site is used. The cookies cannot identify you. If you continue to use this site we will assume that you are happy with this

If you want to use the sites without cookies or would like to know more, you can do that here.

Savers abandoning "outdated and increasingly unattractive" pensions in favour of other financial products

Savers are abandoning "outdated and increasingly unattractive" pensions in favour of other financial products, such as tax-efficient independent savings accounts (ISAs), according to research by the Institute of Directors (IoD).24 Apr 2012

In a new report (66-page / 2.3MB PDF), the professional body states that UK residents are now choosing to pay almost twice as much into ISAs as into pensions annually. It calls for an urgent rethink of pension provision in the UK to reflect society's changing attitudes to savings and an aging population.

The IoD proposes a "radically simplified" pensions regime including one single, flat-rate basic state pension. It also proposes a faster timetable than the Government's current proposals for raising the state retirement age to 70, and the introduction of a formal UK Government savings policy.

Payments into ISAs jumped by almost £10 billion over the previous year's figures to a total of £53.8 billion in 2010/11, the report said. By contrast, employee and individual pension contributions peaked at £25.6bn in 2007, falling to £22.9bn by 2009. An ISA is a type of savings account available to UK residents with a favourable tax status. Money is contributed to an ISA from after-tax income and is not subject to income tax or capital gains tax while held or when funds are withdrawn.

Pensions law expert Carolyn Saunders of Pinsent Masons, the law firm behind Out-Law.com, said it was not surprising that ISAs were more trusted than pension arrangements, but warned that the accounts could not act as replacements for a dedicated pension.

"ISAs are easy to understand and they inspire confidence as a result," she said. "Pension products, on the other hand, have become enmeshed in jargon and are tainted in the public mind by historic scandals such as mis-selling and Equitable Life.

"There are undoubtedly lessons to be learned from the comparative success of ISAs and pension providers and the Government need to take notice. Of course, ISAs themselves are not a sound basis for a pension system because they allow savings to be cashed in as and when needed," she added.

Malcolm Small, the senior pensions adviser with the IoD who authored the report, said that the findings showed that traditional pensions were "outdated and increasingly unattractive".

"Society has changed but pension provisions and Government policy have failed to keep up with the new challenge we face," he said. "The fact that so many people are either not saving at all for retirement or moving to other investment vehicles such as ISAs is a stark illustration that the current architecture has lost public confidence. If we are to avoid millions of people facing poverty in old age, then we need to give them an attractive structure to save into, not simply order them to save."

A simpler system, higher state retirement age and a proper savings policy would "at least provide the foundations for a new retirement savings architecture", he added.

The report described increased longevity as the "elephant in the room" for retirement policy, and suggests raising the state pension age at six-year increments to 70 by 2044. "We need to stop pretending to people that state, or private, pension architectures, were ever designed to support a potential 30 year 'retirement' from an, effective, 35 year working life," it said.

Under current plans the retirement age for women in the UK will rise to match that of men from 2018 before it increases to 66 for both sexes in October 2020 and 67 by 2028. In last month's Budget statement, the Chancellor of the Exchequer announced that future increases in the state pension age will be automatically linked to increases in longevity, with details of how the scheme will operate due to be published in the summer.

Private pension regulations are currently being examined as part of the Red Tape Challenge initiative, a cross-Government drive to abolish outdated or unnecessary regulations. The project, which began in April last year, is considering different areas of the law in stages. The Department for Work and Pensions (DWP) is urging people who deal with pensions processes on a day-to-day basis to comment on specific regulations they find burdensome.

"Good regulation plays a vital role in private pensions saving: it protects business, consumers and employers," said pensions minister Steve Webb last week. "But we need to go back to first principles and make sure unnecessary or overcomplicated regulation doesn't hinder saving."