Can pensions be freed from red-tape tangle?

Financial experts say the Government's Green Paper on getting people to save for their retirement does not go far enough, warns Rachel Stevenson

The window of opportunity to free pensions from their tangle of red-tape ended this week, and Andrew Smith, the Secretary of State for Work and Pensions, is deciding how to make saving in a pension scheme easier.

Yesterday was the deadline to respond to the Government's Green Paper on pension reform published in December. The main proposals were to simplify pensions tax, allow people to work in retirement while drawing their pension, better protect members when a company scheme winds up, and give more flexibility on how to draw your annuity. The message was save more or work longer.

Trade unions, trade bodies, and pensions experts have submitted their proposals but the overriding feeling is there is not enough to make a difference to pension provision. "There were very good ideas in the Paper, but they do not address the major issues of how to fund pensions and how to deliver them," says Mick McAteer, senior policy adviser at the Consumers' Association (CA).

The Trades Union Congress (TUC) agrees. Brendan Barber, its general secretary-elect, says: "There is much to welcome in the Paper, but far more needs to be done to secure a new pensions settlement." He wants everyone to be compelled to save in pension schemes, a policy backed by the CA. Mr McAteer believes the potential for spreading pensioner poverty is so great, only compulsory saving will help.

The proposals with the biggest potential to have an impact on pension-saving were in the tax changes planned by the Inland Revenue. These seem to have had all but unanimous support by leaders of the pensions industry. "This is a tremendous opportunity to reduce complexity and some of the disincentives to save," says Philip Scott, head of Norwich Union, the largest pension provider in the UK. "A single tax structure rather than a multiplicity of rules seems highly desirable and ought to achieve its objective of making pensions understandable to consumers."

Now, what you can contribute to a pension and what you get from it is subject to a vast array of rules, depending on what year you started saving and how much you earn. The Inland Revenue says that can all be swept away so you can contribute any amount to any type of pension as long as it is no more than £200,000 a year and your fund is not worth more than £1.4m by the time you retire. What you have above the £1.4m lifetime limit is hit with a hefty tax bill.

There are problems with this lifetime limit. As Mr Scott says, soaring investment returns could take your fund value above £1.4m. He and many others, think the lifetime limit should be based on the total level of your contributions, rather than its final value, because this is what the tax relief you enjoy is paid on.

The Government plans to make the tax-free lump sum, among the most attractive perks of using a pension to save for retirement, 25 per cent of your final pension pot, no matter what type of pension you have. For many, this will make financial planning much easier, because the lump sum is often used to clear outstanding mortgage loans when they retire.

Changing rules to allow people a money-back guarantee on their annuity before they are 75 has also been supported as a step forward. Ways to improve protection for pension scheme members when schemes are wound up are also supported in principle, such as putting pensioners higher up the pecking order in the list of creditors.

The plight of workers in the now insolvent engineering firms, ASW and UEF, has focused attention on this issue. Many workers had paid in to their pension fund for years only to find themselves with pensions worth only a third of what they should have been.

But again, these proposals have been criticised for not going far enough. Amicus, the UK's largest trade union, wants a collective insurance fund that would bail out the pension fund if a company went bust. Not many employers are willing to stump up extra cash to support weak employers and their ailing pension schemes.

Some trade unions believe the Government is not doing enough to stop more employers abandoning their company schemes. The Engineering Employers' Federation wants a timetable for implementing changes to give employers hope that their rising pension costs will soon ease.

Virgin Money says 2.4 million workers miss pension contributions worth £3bn by not joining their company scheme. It says employees should automatically be entered in to the fund, with an opt-out clause for those who did not want to join.

The Green Paper did not assess the state pension system, which many see as its biggest downfall. Cross-party MPs, policy think-tanks and trade bodies believe the complex labyrinth of means-tested benefits penalises modest savers and needs fundamental reform. While this system remains in place, only the wealthy know saving for a pension is worthwhile.

Mr Smith has a lot of bedtime reading. The tax changes should make a substantial difference to simplifying pensions, the wider pensions framework – the precarious and uneasy balance of employer, state and the individual – looks unlikely to be settled this time round.