Risk-sharing
With Defined Benefit, the bulk of the risk and associated cost lies with the employer. With Defined Contribution, the risks are borne by the employee. A half way house needs to be found to avoid undesirable outcomes.
A pensions framework that allows the best of defined benefits (a specified amount of expected income) and the best of defined contribution (sustainable and affordable) in one scheme should be considered. This would:
a) instil confidence in employees that their pension savings will provide a known level of income, rather than an amount that depends on the vagaries of the stock market.
b) allow employers to know what their costs will be in the future.
There are various ways that risk sharing can be achieved; for example defined cash or conditional indexation. The problem is that legislation is stifling innovation in this area and must therefore be changed. But we need to avoid specific changes which allow just one solution.
Flexibility
In general terms, people understand saving. They save money for a while, and use it when it's needed. But pensions aren't like that. Individuals have to wait for a long time before they get the benefit. Because of this, pensions can be perceived as irrelevant. People in their 20s and 30s may well have other priorities - saving for a mortgage deposit, raising children. Allowing earlier access to pension savings would make them more relevant and would encourage saving in these tax-efficient vehicles. There is already a tax free lump sum available from pension savings. In certain restricted circumstances, savers should be allowed to make withdrawals up to the maximum amount of cash already available. The circumstances could include to provide a mortgage deposit, on childbirth, or on the death of a partner.
Once pension savers reach the age of 75, they have no choice but to annuities, whether they like it or not. Again, the legislation should be changed to let people choose what to do with their savings.
And some flexibility should be introduced to allow a transfer into a tax efficient long-term care vehicle, or pension savings for grandchildren, with suitable tax charges if need be.
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