Pensions: filling the funding gap

The poll tax inspired this solution to the pension funding crisis. But it isn't a tax...

1. Fixed payments can bring much needed additional funding into pensions without increasing the marginal rates of income tax or national insurance tax.

2. A compulsory additional pension scheme with fixed-level deductions made through the tax system will be used to endow personal funds (funded from after-tax income). Top-up payments will be made into the scheme on behalf of the lowest paid. [Click here for details of how the funds will be managed]

3. Above the minimum weekly deduction, taxpayers will make an annual choice of their regular investment level. Taxpayers will be encouraged to commit to the maximum investment allowed. It will be a tax efficient way to save.

4. Incentives to increase regular savings might include: bonus payments from government; earning the ability to make additional lump sum investments above the normal annual limits; and earning the right to use part of the balance, or to borrow against it, for approved purposes (full repayment of a mortgage or as a deposit; meeting higher education costs; and business start-up).

5. The tactical use of incentives (“promotions” rather than “tax-breaks”) will elicit incremental savings from all income groups. It will be very difficult for a taxpayer to manipulate his or her effort, pay or current savings behaviour in order to unfairly and disproportionately take advantage.

6. The annual limit on investments will vary with age. Those workers closest to retirement will be able to invest the most.

7. In addition, it will be made compulsory to join an employer's pension scheme, where one is available, and it will be made more difficult to borrow against future pension entitlements.

8. It's unpopular when any one employer increases the pensionable age on an occupational scheme. So all employers and occupational schemes should be obliged to increase the pensionable age to at least 63; a vital step to secure the long-term strength of such schemes and to encourage employers to make generous pension provision.

9. A transparent system of pension targets is needed to set out, in today's money: i) how much a pensioner needs to live on, per annum; ii) how much a retiring worker needs to have in their pension fund at the age of 68; and iii) how much workers need to save into their pensions every year. In all cases very conservative capital growth assumptions should be used - helping to restore the perceived link between what people put into their pensions and what they get out.

10. Provided that the size of an individual’s home is not excessive compared to his or her needs, there will be a much more generous disregard of savings balances in all benefit calculations. The Pension Credit will be reformed to assume a realistic rate of interest on savings.