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Keep it simple to take pain out of pensions

Posted by Jez Davison on June 23, 2009 1:22 PM | 

THE pensions crisis is a huge millstone around the neck of public finances - and the private sector will be next to feel the pain.


From 2012 the Government's new Pensions Bill comes into force and will require employers to make a 3% financial contribution to pension schemes for staff earning between £5,035 and £33,540.

For big corporate machines, this will be a drop in the ocean. For the smaller player, it will be a difficult burden to bear.


The rationale behind the Bill is sound enough: incentivise more people to save for their retirement. The Government fears that with more people living longer, thousands of cash-strapped pensioners will fall into poverty.


The problem is not going to disappear without major investment from workers - and making companies foot some of the bill is a partial solution at best.


The Government needs to tackle two key issues at the root of the crisis.


Firstly, recession-hit workers want to see an economic upturn before they will start saving again.


At the moment they are grappling with more pressing concerns such as paying the mortgage and bills and keeping their jobs.


Secondly, ministers need to make pensions more accessible to the man and woman on the street. People are wary of investing in something they don't fully understand - with pensions a jargon-filled minefield for many.


Even those who have a pension struggle to work out what their annual return will be on maturity.


The ignorance surrounding the subject ought to pave the way for a major simplification of pension rules. Even accountants say the UK system is unnecessarily complicated compared with other European countries.


The Pensions Bill alone will not be the panacea for the savings crisis. The Institute for Fiscal Studies (IFS) estimates that the changes are likely to generate only a small increase in savings - especially with the opt-out clause making pensions non-compulsory.


With property prices plummeting and pension fund values falling off a cliff, investors are seeking safer havens for their cash.


Pensions are now seen as the ugly sister and may never regain their former pulling power.

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