Greater flexibility in how retirement savings can be used is key to renew ‘social contract’ between generations, the Association of Consulting Actuaries (ACA) has said.
In this context, ‘social contract’ looks to pension, saving and tax arrangements offering a fair balance across the generations, so people of all ages feel they are not being disadvantaged by the pensions system.
This comes after the Intergenerational Commission released a consultation named As good as it gets? The adequacy of retirement income for current and future generations of pensioners, which seeks solutions to the perceived growing gap in income outcomes across different generations.
In response to the consultation, the ACA sent a letter to the commission on 15 December, arguing its evidence looking at intergenerational fairness in retirement does not support the conclusion that “overall, future pensioners look set to experience similar levels of earnings replacement adequacy to recent retirees.”
It further states given competing savings needs and an increasingly exclusive reliance on defined contribution (DC) pension provision, many young people risk retiring on materially lower relative incomes than current retirees.
The trade body’s committee member Steven Taylor and its Younger Members Group chairman Chintan Gandhi said they agree many of the challenges of accumulating adequate retirement savings, such as competing savings needs, are not unique to the current generation and have been building for some time.
“However, in our view, these pressures have now reached a stage whereby many young employees are unable to save sufficiently or are put off from saving altogether.”
Policy proposals
The ACA has suggested three policy proposals in response to the commission’s consultation. It first said there should be a ‘National Flexible ISA’ to allow withdrawals of up to £30,000 from pension saving in the accumulation phase – to fund house deposits or potentially other limited spending needs.
According to the trade body, this complements flexibility of tax-free cash lump sums and withdrawals under Freedom and Choice in the decumulation phase, can be taxed consistently, and offered through existing occupational DC schemes (which the relatively complex Lifetime ISA is unable to do), without the need for extensive new legislation.
It added to ensure pension saving is restored after withdrawals, additional minimum employee contributions could be mandated for those who flexibly access cash in this way.
The ACA also proposed changes to pensions tax reform. It said in 2015/16, £38.2bn was received in pensions tax relief, with around two-thirds of this going to the 17% of the population paying higher or additional rate tax (and most likely to be towards the older end of the age spectrum).
It added any of the major tax reform options (ranging from flat rate relief to pensions ISAs) that have been considered in recent years could result in a saving on this amount and hence achieve a positive intergenerational impact.
It further suggested realigning retirement expectations, meaning retirement outcomes are likely to be improved by helping individuals to make realistic assessments of their expectations for retirement so that they can set appropriate savings targets.
Taylor said: “Given the significant financial incentives for retirement savings, e.g. tax relief and often generous matching employer contributions, the crowding out of retirement saving by shorter term needs should be a key area of concern for future public policy.
“In particular, for today’s generation to save adequately for retirement, we believe ways must be found to allow young people to save flexibly, for multiple purposes, without disincentivising retirement saving.”
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