There have been calls recently for the government to consider changes to auto-enrolment that would introduce a ‘sidecar’ savings mechanism to encourage workers to build up emergency funds.

The idea is employees could voluntarily increase their monthly contributions but have savings held in a separate account until they reached a certain level and were transferred to the pension pot. Nest has been running a trial version of this scheme for a while.

It is always great to make pension saving more flexible and to encourage more people to build up emergency reserves, but the idea of a separate pot running alongside a pension is a rather clumsy way of achieving this. It would be far easier to implement and understand if the government made a simple, but fundamental, change to pensions legislation.

LEBC welcomes sidecar savings proposal, pushes for wider reform

It should consider allowing all voluntary contributions made into all pension schemes above the minimum auto-enrolment levels to be freely withdrawn within the first, say, two years of investment. This would mean anyone saving above the minimum auto-enrolment levels would always have emergency funds available.

Flexibility

Such flexibility around access would also make it easier for people to commit to higher levels of pension saving in the first place, and ought to encourage greater levels over the long term.

All monies deferred from income and put aside should continue to be made tax free, but anything withdrawn would be subject to income tax.

That should also allow for an effective higher rate of return on any such savings, without people having to set up additional schemes and without employers having to implement complex arrangements to pay pension money into one pot and voluntary savings into another.

Early retirement: Do clients have a back-up plan?

This simple change to legislation would give millions of workers instant access to emergency funds while saving millions of employers from having to make changes to pension or payroll arrangements.

Yes, it would make pension schemes harder to administer, but that’s a small price to pay for the increased interest generated in additional pension saving.

Steve Bee is director of Work Life Benefits

This article featured in the June 2021 edition of MM. 

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The sums of money involved are substantial and may equate to as much as £13,500 in payments to people.

Those payments will now need to be both quantified in each case and reimbursed, and there are apparently hundreds of civil servants now working frantically to do just that as a manual process.

Quite apart from anything else, this must surely be a wake-up call to any of us who care about the problems bound to occur when a system gets to become as bewilderingly complex as we have allowed both our state and private pension systems to become.

That substantial mistakes can be made in calculating the state pension entitlements for so many people, and that neither those who calculated them nor those who were in receipt of them had any idea the mistake had been made for over a decade, speaks volumes.

It seems unbelievable that we have a pension system so complex and labyrinthine that such a thing could have occurred. But we clearly have.

A system so complex is of no use to anybody, whether that be today’s pensioners, today’s workforce or today’s public servants who have to administer it.

I would imagine that if any of us took the time to question thousands of ordinary people we would find very few among them, if any, who could properly describe the way the state pension is calculated. Indeed, I would guess few would have any idea even of their own state retirement age, let alone how much pension they are likely to receive from the state when they finally get there.

The same is probably true, though, with company pension schemes.

How many people in the imagined thousands we could interview would have even a vague idea of the value of their occupational pension holdings, particularly if they have changed jobs a few times? Not many, I’ll bet.

While nobody would find that at all surprising, we should all find it to be worrying.

If people by and large have no idea of what they can expect in pension payments from the state and their various terms of employment, how on earth can they possibly make sensible plans for their retirements? They are left simply hoping for the best while fearing the worst.

Of course, those lucky enough to be advised by professional financial advisers will be able to understand their pension entitlements and options, but very few people in the general population can actually afford financial advice.

There is much discussion these days about the so-called advice gap. I think that is a misnomer. It is an advice chasm. Most have no access to advice and nor are they ever likely to if things carry on as they are.

None of us should be happy with that.

Steve Bee is director of WorkLife by OpenMoney

The post Steve Bee: Our labyrinthine pension system isn’t fit for purpose appeared first on Money Marketing.

Put simply, the state pension both is, and will continue to be, crucial for the longer-term wellbeing of tens of millions of British people.

We are all aware of the plight of the Waspi women in recent years – a movement that grew from the outrage associated with poorly communicated and rushed changes to the state pension age of women as they were moved to a common retirement age with men.

These changes were put in place in 1995 and had their implementation accelerated in 2011, just as the adjustments to pension ages and pension amounts were taking effect.

Steve Bee: The truth hurts, but the state pension’s days are numbered

It was inevitable that changes structured in such a way as to lead to vastly differing retirement outcomes for people born sometimes just days apart were open to criticism. Surely it was as unnecessary as it was cruel.

Indeed, there should never be any need to make sudden or forced changes to the state pension system. As far as intergenerationally funded benefits like pensions are concerned, the ship of state should never need to turn on a sixpence.

The number of people born, both men and women, in any year or decade is known with great precision. Indeed, the data we have regarding our citizens is far richer than just their sex and dates of birth; we even know their names and addresses for goodness’ sake.

What caught your eye in 2020: Money Marketing’s most read

With such useful data at our disposal it should be relatively simple to precisely model the financial and social outcomes of both funding and providing a state pension that all parties – workers, pensioners and the state – can understand and rely on.

It costs a great deal of money to provide generous state pensions to millions of people and it speaks well of our society that we prioritise such endeavours.

But the time has come for the establishment of a new, independent pensions commission to assume responsibility for this important pillar of our national life. Pensions are too important to be left to the hurly-burly of everyday politics.

Steve Bee is director of WorkLife by OpenMoney

The post Steve Bee: Urgent call for a new pensions commission   appeared first on Money Marketing.

Recent research we undertook found most SME businesses had seen the mental wellbeing of their workers impacted by the pandemic. Thirty-nine per cent of the employers surveyed said employee mental wellbeing had been worsened by concerns about their physical health and that of their loved ones, while 42 per cent cited the added stress of job insecurity.

The impact on workers’ personal finances has also been concerning, with income often disrupted. According to UK Finance, banks and lenders have so far agreed more than 700,000 personal loan payment holidays, one million credit card payment holidays and almost two million mortgage payment deferrals.

Of course, having more time to pay your debts only delays the problem. Debt charity StepChange estimates 4.6 million people will have their finances negatively affected because of coronavirus, accumulating an extra debt burden of £6.1bn. Among this group, average debt will rise to £997 per household, along with a further £1,076 in increased arrears.

Lateral thinking may be useful here. These days, almost all employees are accumulating pension savings through the workplace. The auto-enrolment reforms have changed the long-term savings market in the UK and, before the pandemic at least, many commentators regarded the main issue as being how those savings could best be maximised. I agree with that aim: the more people defer income and put it away for the future, the better it is for them and for everyone else.

But pension savings are locked away for many decades before they can be accessed and I think that needs to change before any serious increase in future savings levels becomes likely. It would clearly be useful if people could access funds held in their pensions at times of severe economic hardship, and return the money over a period — say five to 10 years — when their financial situation had improved.

It would be interesting to model what that could look like if the 25 per cent tax-free cash element of pension savings could be made available for employees at any age as a hardship withdrawal — the terms of which could be set and governed by legislation. Hardship payments in such circumstances could be made free of tax as long as the loan was repaid in a specified time.

What better way to make pensions seem more relevant than to allow employees to temporarily borrow such savings from their future selves in times of trouble?

Steve Bee is director at WorkLife by OpenMoney

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For as long as I can remember the run-up to every chancellor’s Budget has seen widespread speculation that higher-rate tax relief on pension contributions would be removed and result in enormous savings for the Treasury.

This year is no different; rumours already abound. So far it has never happened and fears have been unfounded, but the Budget this year is clearly going to be quite unlike any since the early 1970s.

The basic principle of voluntary pension saving is that income tax is not paid on deferred earnings, but rather on the income paid out as a pension. You pay your income tax when you draw your savings as income.

The one marked difference to that is the tax-free cash that applies to a portion of UK pension savings, which can be described as EEE (tax exempt on entry, growth, and exit). That to me is the one true benefit of long-term pension saving and should be seen as a reward to pension savers for deferring income over many decades, both for their own benefit and the general good.

The removal of higher-rate tax relief on pension contributions would mean people who pay the higher rates of tax would effectively be taxed twice on their pension savings: once when they defer income and save it and again when they finally draw their savings as income.

No one in their right mind would voluntarily save in a system that taxes them twice for the privilege of saving. The removal of higher-rate tax relief would mean it would only be sensible to save in a pension while you are a basic-rate taxpayer.

Higher-rate taxpayers can afford to pay a bit more in tax, but there is more to this issue than that in a pension system where saving is largely voluntary.

Today’s pension landscape sees ever-decreasing annual and lifetime limits on pension saving, and ever-changing labyrinthine rules and regulations making it practically impossible for people to even understand, let alone control, their pension savings.

The simple act of deferring income for much later in life has become a quagmire of red tape that very few can negotiate without expert financial advice. That is plain crazy when what is really required is a simple system based on simple principles and that is not subject to constant change.

Such a system would be better still if employers could also be given additional tax incentives on their own pension savings based on the coverage and pension contribution levels of their employees.

A system based on mutual self-interest of both employers and employees would likely lead to a thriving pension system once again, this time based on the recent auto-enrolment reforms that have extended workplace pension schemes to most UK employees.

Steve Bee is director of Work Life Benefits

The post Steve Bee: Pensions must be simple and consistent appeared first on Money Marketing.

Men used to retire at age 65 and women at age 60. That was the way it has been in the UK since the 1940s. That has all changed and is set to continue changing and create more of the repercussions rippling through retirement planning as I write.

The state pension age for men and women has been equalised at 65 and that common pension age has also been programmed to increase over time. It has recently changed so men and women now retire at age 66. By the end of the 2030s the state pension age is set to be 68. It is unlikely to stop there.

Anyone who has been following the latest court case regarding the Waspi movement will be aware of the mind-boggling sums of money that have accrued to the public purse through women’s state pension ages being increased from 60 to 65 in a short period of time. It is not hard to imagine the magnitude of the future amounts that can be saved by increasing the common pension age for both men and women from 65 to 70 and beyond.

Pensions are costly to provide, particularly pensions like the state Pension that are not funded in advance. Future taxpayers will bear the cost of providing state pensions for today’s workers and high tax rates are not popular.

Cutting the cost of pensions is easy enough to do. The amount paid can be reduced, or the rate at which pensions increase, or the length of time pensions are paid. Any one of those three methods can be used to lessen the burden of state pensions on future taxpayers. A combination of all three would be even more effective and that, of course, is what’s most likely to happen.

The long-term prognosis for state pensions in the UK is not good. We have recently seen the auto-enrolment reforms kick-start funded pension savings for millions of workers, but that reform came at the cost of our losing the state second pension.

At present levels of minimum contributions to auto-enrolment workplace pensions it’s unlikely many will accrue much larger pensions than they would have got anyway from the second state pension. 

Auto-enrolment was a reform in the sense that previously unfunded state pensions will be broadly replaced by funded company pensions, but not a reform that in itself is likely to result in increased pension outcomes for many, if any of us.

My view is that the state pension in the UK will become increasingly less relevant over time, particularly for those entering the workforce in the 21st century. If people want to be able to leave work and retire when they are older then they will have to do so under their own steam. 

The financial services industry, along with employers have a key role to play if millions of UK citizens in future are to have any real chance of a comfortable retirement at the end of their working lives. 

Workplace pension schemes need to promote the value of deferring income and making substantial long-term savings, particularly those schemes that were recently established to accommodate just the auto-enrolment regulations. 

Financial advice is important too. If ever there was time that working people needed to look out for their own interests and make the correct long-term financial decisions at the right time in their lives it is now.

 Steve Bee is director of Work Life Benefits

The post Steve Bee: The truth hurts, but the state pension’s days are numbered appeared first on Money Marketing.

But this is surely a modern myth dreamed up by marketing people. Maybe some people do end up leading such lives, but I doubt many do or would even want to.

To many people the reality of retirement is likely to be more about coping with the chronic pressures of everyday life that never go away, but simply change over time.

Pressure relating to money and finances; pressure relating to children struggling with their own circumstances and worries; pressure relating to their grandchildren and their health and wellbeing; and, for many, pressure supporting their ageing parents as they reach their final years.

And financial pressures don’t magically evaporate the day you stop work and start drawing your pension.

Regular income

Retirement is, and always has been, about income streams. When we are young it is fairly easy in our society to sell our time in return for a regular income.

One retirement strategy some people follow is to carry on selling their time and effort as they age by simply carrying on working. There is much to be said for that, but not everybody is able to physically carry out working tasks as they reach old age, so it is not possible for everyone to expect to do that.

People reaching their late 60s these days receive regular income from the state in the form of a state pension. That is an income stream most of us can rely on, but the realities of government finances mean it is more like a trickle than a stream. Worth having, but barely enough to live on.

The single most useful income stream working-age people can engineer for their older selves is a pension. By putting serious amounts of money aside while they are working people can ensure they will likely be more able to cope with the financial pressures that will confront them in their post-working years.

A pension scheme operated and contributed to by employers is demonstrably the best way to instil the discipline necessary to both encourage and help people regularly defer income in favour of long-term savings. That’s why the recent auto-enrolment reforms were, and are, so important.

Steve Bee is director at OpenMoney Benefits

The post Financial pressures don’t vanish in retirement appeared first on Money Marketing.

The UK financial services industry and its advisers in particular are highly skilled at providing advice. And those who are able to access this advice benefit enormously from doing so. They have peace of mind knowing they are in control of their financial affairs and professionals who completely understand their needs and wishes are guiding them. This is something surely everyone desires.

But it seems unlikely, given the way the industry is currently structured, that any but a wealthy few will ever have access to the full range of advice and guidance from which all of us could benefit.

The industry has many wealth managers, but few wealth builders. I suppose that’s not surprising, and it’s easy to understand why an industry should have grown to meet the investment and financial advice needs of the wealthy. But there is more to financial advice and wellbeing than this. For the ordinary citizen struggling to make ends meet in an increasingly uncertain world, financial guidance and advice have never been more necessary.

Emergency Financial Advice project gets off the ground

In the longer term, it would obviously be a good idea if people were taught at school how to competently manage their financial affairs throughout their lives. But that solution, even if feasible, is generations away and will not help the tens of millions at work today to become financially savvy.

For financial capability to be passed on to the current workforce, something far more revolutionary must happen.

The obvious place for that to start is through the one wealth-building process already in place.

Since the introduction of automatic enrolment eight years ago, most employees in the UK have had access to a wealth-building mechanism – a company pension scheme. Building on that and making a wider range of benefits and services available in the workplace, including access to regulated advice, is the one sure way to help people take control of their own finances.

The workplace is where we earn our money, but it could also be where we learn how to manage our money and make the most of it.

The challenge for our industry is to take the excellent skills and processes that have been built over many decades to help our wealthier citizens manage their finances and make them available to all.

The information required to help people understand personal finance is all there in the industry today, and the technology to make it happen exists too.

For those of us currently at work, the need to understand and control our own finances is arguably greater than ever before.

All that’s required is for the financial services industry to want to achieve this.

Steve Bee is director at OpenMoney Benefits

The post Steve Bee: Let’s get money working for everyone appeared first on Money Marketing.

Even the state pension, which so many regard as a miserly amount, would cost about the same as the average UK house to provide as an annuity for a 66-year-old. That’s something that perhaps those in government should shout about a bit more, although it’s probably best our politicians don’t think of the state pension in such terms.

Under 35s pessimistic about state pension future

The reality, which so few people, politicians or not, seem unable to grasp, is that pensions cost a fortune. It’s not cheap to provide people with an inflation-proofed guarantee late in life so they can leave the workforce, put their feet up and rely on the monthly income rolling in for as long as they remain on the planet.

In our modern times employers and the government seem far more concerned about the true cost of pension provision than they did, say, 50 or 60 years ago, when many of the big UK defined benefit workplace pension schemes were first established and the state pension was paid out at younger ages than it is today. The company pension schemes too, or at least the DB ones, have historically relied on the employer paying the lion’s share of the cost of provision with maybe just a fifth or so of the cost being picked up by employees.

It seems clear the pensions coming from company pension schemes 50 or 60 years hence will likely have been funded more equally between employers and employees, and will be less likely to be so generous as the pensions being paid out to company pensioners today.

The past of UK workplace pension provision was really all about incentivising employers to provide and fund company pension schemes. The future will be more about incentivising employees to forego consumption and put more away for the future.

It’s time to push pensions forward

That is completely different and much harder to do, particularly as pensions legislation is mind-bogglingly complex and is barely understood by anybody in the country.

It is difficult to see how tens of millions of employees will ever be persuaded to defer income and save vast amounts of money into something they cannot properly understand and have so little control over. So difficult, I would say, that it is highly unlikely to happen.

If that is right then the workforce of the first half of the 21st century will have a completely different experience in their old age, with regard to pensions, from that of the workforce of the second half of the 20th century. The days when people’s pensions might be worth more than their houses may soon become a thing of the past.

Steve Bee is director of OpenMoney Benefits

The post What will future pensions look like? appeared first on Money Marketing.

Of course, for those of us in the financial services industry none of what was revealed in the two programmes would have come as any surprise, but there is a supreme irony in that. Our industry, or so it seems to me, is good at talking to itself but hopeless at explaining the benefits of, or the means to achieve, financial capability to outsiders.

For the past 50 years we have had a polarised approach to pension provision in our country. Half of the workforce has been covered by extremely generous workplace pension schemes and the other half has had to rely on one of the least generous state pension systems in the developed world.

Government confirms new pensions bill details

It is something that we never seem to talk about, though.

The changes in the past decade that saw the demise of the state second pension, S2P, and its replacement with auto-enrolment are widely regarded as fundamental. I am not sure I agree with that.

While it is true that nearly all employees in the UK now have access to a private-sector workplace pension scheme for the first time, it is equally true that the statutory minimum level of contributions from both employers and employees is hardly going to make anyone well off in retirement.

It is also arguable that in many cases the auto-enrolled workplace pension will not amount to any more in the way of future pension income than people would have got from S2P if it had simply continued unchanged. And the efficiencies of running millions of small pension schemes in the private sector rather than through the existing National Insurance system are surely illusory?

But I doubt this is anything that could fuel a national debate of any value. I’d be amazed if more than a handful of people questioned about it would have any idea that we have had two state pension schemes in the UK since 1961 and that half of the workforce has been accruing benefits in both while the other half has only been entitled to benefits from just one of them. I would imagine most people are of the view that we have the Old-Age Pension and that’s it.

Paul Lewis: The five cons of auto-enrolment

There is a strong case for introducing lifetime financial capability as a core subject in the national curriculum for schools and some good steps have been taken in that direction in the past few years. But there is the huge and pressing task of helping the millions already at work to both understand and take control of their future finances. That, though, will take more than the odd TV documentary.

My view is that employers, particularly those in the SME sector, are our best bet for initiating the required spread of financial capability to today’s workforce. Employees have a high level of trust in their employers.

The UK financial services and financial advice industry, if it can be of any use in this at all, should consider ways in which it could help employers in this task as a matter of urgency.

Steve Bee is director at OpenMoney Benefits

The post Waking up the public to the sleeping pensions giant appeared first on Money Marketing.

So people are rattled by spiders and would rather not get up and speak in public. So what?

Well, I read in Money Marketing recently that people were scared to open their pension statements! That’s what.

Profile: ‘I know hundreds of people scared to open their pension statements’

That was a penny-dropping moment for me – it explained a lot. I spent a big part of my career in financial services speaking in public about pensions. No wonder it was so scary.

While I was looking up the lists online, by the way, I noticed that hippopotomonstrosesquippedalio-phobia is the name for the fear of long words. I mean, is that ironic or what? I’ve written it down in my notebook though, as I’ll probably use it in a future pensions talk.

And that’s the point, I suppose. I, or more likely people like me, will probably spend decade upon decade in the future travelling the country speaking at conferences about the scary intricacies of pensions, just as we did in the past. But the real point, that pensions are unnecessarily complex, never seems to hit home, does it? Particularly with those responsible for designing the complexities.

Are we in danger of finally getting simpler pensions?

I rather doubt people who save with Isas are scared by them. They probably understand them pretty well, and have no trouble knowing why they’ve got them and what they can do with them. Isas are simple, friendly and easy to understand. Nothing to be afraid of there.

But pensions? The phobia kicks in just at the thought of them – DC, DB, income drawdown, lifetime allowance, Sipps, auto-enrolment…and that’s before you even start considering the constant changes.It can be genuinely frightening.

And how much pension do you have in your umpteen different pension pots? Who often knows and how many people are scared to look?

Employers are required by law to provide pensions for their employees (or at least the majority of them), so we can’t avoid them. They are a fact of life, just like spiders.

Open Money acquires Jargonfree Benefits

So if we’ve got to have pensions what needs to be done to make them more acceptable to us? Nothing much really. All we have to do is to scrap all the existing pension rules and replace them with a simple Isa-based system with the tax relief up front – Exempt, Exempt, Taxed Isa. That would do it.

If we did this simple thing people would gradually lose their fear of pensions over time.

As history shows, however, our legislators absolutely love to complicate things, and would no doubt find the idea of pensions that ordinary people can understand quite scary in itself.

Follow him on Twitter @PensionsGuru

The post To get savings up, take the terror out of pensions appeared first on Money Marketing.