Pension system discourages saving, says PwC

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The pension system in its current form fails to provide an incentive for people to save, accountancy firm PwC has argued.

The complexity of pensions is putting people off saving - particularly women and younger workers, a survey by PwC suggests.

It also suggested that contribution levels were insufficient to provide the retirement income that workers expect.

On average, workers wanted a retirement income of £22,200 a year.

PwC calculated that an employee starting work at the age of 22 would need to save a total of 15% of their annual salary towards their pension.

Its survey suggested that only one in 20 workers were putting aside more than 10% of their salary towards a pension.

"It is clear that many people's expectations of their pension pot and the reality at retirement will be very different as people simply are not contributing enough to their pensions," said Raj Mody, head of pensions consulting at PwC.

"Any system that is asking people to lock up their money for many years needs to be simple to understand, trusted and sustainable to encourage greater savings levels. It also needs to include a strong up-front incentive."

Among PwC's suggestions are:

  • A single rate of tax relief on pension contributions
  • Taxing money put into pensions in return for an up-front contribution from government
  • Improving financial education

It said there needed to be a focus on contributions made by those automatically enrolled into pension schemes.

Duncan Howorth, chief executive of pensions consultancy JLT Employee Benefits, agreed that the system of tax relief should be simplified to encourage more lower and middle earners to save.

"We believe we should go to a single [tax relief] rate of one third, 33%.

Effectively we can promote that by saying if you invest £2, you'll get £1 back from the government. A simplification of the message is a way that we can incentivise people for the long-term," he told the BBC.

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Lamborghini effect

A government consultation on how pension contributions should be taxed and what incentives should be offered to savers closes on Wednesday.

Steve Webb, the former pensions minister, advised the chancellor not to adopt so-called pension Individual Savings Accounts (Isas) - which are being considered by the Treasury.

Pension Isas would be "front-loaded" for tax, meaning that consumers would pay in savings that had already been subject to income tax, but they would allow those over 55 to withdraw their pension savings tax free.

Under the current system, people only pay tax when they take money out of a pension scheme.

But writing in the Daily Telegraph, Mr Webb says the system of paying tax on withdrawals acts as a disincentive for people to take out too much at one time - the so-called Lamborghini effect.

"The taxation of pension incomes provides a 'brake' on the Lamborghini," he writes. "Having to pay tax makes you think twice about withdrawing the lot in one go; if pensions are tax free, what would hold you back?"

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