News
Give people early access to pension savings
The UK’s largest insurer with seven million life and pensions customers is proposing a series of reforms to the pension system to make retirement saving more flexible, relevant and attractive to UK savers.
Aviva research into consumer attitudes to saving and retirement identified widespread confusion among the population when planning for retirement. Building on this insight, Aviva has proposed the following:
- Allowing early access to pension savings before retirement
- Introducing flat-rate tax relief on pension contributions
- Replacing pension credit with higher basic state pension
- Including state pension statements with personal accounts
- Introducing alternative workplace savings plans.
Encouraging private savings: Nearly half (47%) of surveyed pensioners in their first year of retirement said they wished they had saved more for retirement.
To make it easier to save, Aviva is proposing the following reforms:
Allow early access to pension savings: Tying up cash until retirement is a significant barrier to pension saving. Nearly all (85%) of people surveyed manage their finances within a time horizon of one year or less.
Aviva proposes that pension savers are allowed to withdraw a portion of their pension savings before retirement – removing a psychological barrier to long-term saving. To ensure retirement plans of pension customers remain protected, Aviva proposes this change is introduced with a set of simple rules developed with consumers, the industry and HMRC.
Harmonise tax relief: UK customers are aware that pension savings do enjoy tax benefits, but nearly all (83%) people surveyed do not understand how tax relief works for them. Aviva proposes that a harmonised rate of tax relief is adopted to replace the confusing higher and lower-rate tax relief system.
It claims that this change would benefit and encourage the 85% of people who are basic-rate taxpayers, and could add more than 14% to the value of their pension fund at retirement.
Introduce alternative work-based savings plans: Many young people do not recognise the benefits of saving into a pension when retirement can be more than 40 years away. To start a savings habit among the young, Aviva proposes employers are encouraged to provide shorter-term work-place savings for those under 25 as an alternative to pensions (such as employer-sponsored ISAs).
According to Aviva Some 63% of people surveyed believe the basic state pension will be their first or second source of retirement income. But more than two-thirds of people don’t know or overestimate the value of the state pension.
Consequently Aviva proposes:
- Abolishing pension credit and introducing a £130 basic state pension for all: The pension credit, introduced in 2003, has supported many in retirement but the system has flaws. Only 59% of people approaching retirement are aware of pension credit and it is estimated that one-third of those entitled are failing to claim.
- Aviva proposes that pension credit is replaced with a £130 basic state pension for all, funded by new national insurance contributions for those above a certain income in retirement.
Introduce an annual state pension statement with personal accounts: The Pension Service responds to 400,000 requests for individual state pension forecasts every year - covering about 1% of the working population. Aviva recommends that annual statements for personal accounts – a Government-sponsored workplace pension available from 2012 – include a forecast of the individual’s state pension benefits. A yearly state pension forecast sent with personal account statements will powerfully illustrate the impact of not saving enough for retirement to an expected nine million new customers.
