Millions of Britons could be spared from poverty and uncertainty in old age if modest changes were made to plans to introduce Personal Accounts, according to research by the Royal Society of Arts (RSA).
In its report, Pensions for the people: addressing the investment crisis in Britain, the RSA concludes that, although the government’s policy of auto-enrolment and Personal Accounts represents a big opportunity for UK savers, the scheme must be extended to cover pension payments above £3,600 if it is going to have a major impact.
The report says that by limiting pension payments to £3,600, the government will force many savers across the UK to open private pensions that often charge exorbitant fees (sometimes up to 40% of the value of their pension).
Written by David Pitt Watson, a leading pension scheme manager and founder of Hermes Equity Ownership Service, the report argues that this simple step would not require employers to match higher levels of saving; merely that higher savings can be placed in, and invested through, the same pension pot.
The RSA proposes that the infrastructure of the Personal Accounts system should be made available to a wide range of approved providers that conform to the basic principles of responsibility and low cost.
Pensions for the people also makes the case for the development of a new type of pension scheme that would cut costs by two thirds, increase returns on pension savings by up to 50% and work to ensure companies are run in the interest of long-term owners. It should also be committed to responsible investing, eschewing the investment practices which encouraged the credit crisis.
Initial costings, worked out with APG, one of the world’s largest pension schemes and fund provider, confirmed that it is possible to provide all the main elements of the proposed fund, subject to scale, for around 0.5%. Over the lifetime of a pension, that would cost about 12% in fees and administration. At present, a typical private pension in the UK might cost 1.5% a year or nearly 40% over the life of the pension.
Commenting on the report, RSA chief executive Matthew Taylor said: “Without making changes to the way the Personal Accounts scheme is implemented the government will struggle to get the project to come in on budget. Limiting pension payments to £3,600 also sends a dangerous message to the public that saving £3,600 a year will be enough to support themselves through their retirement.”
www.the RSA.org
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