The perfect pension

Plans for the next generation must be clear, cheap and safe, writes Clifford German

The pieces of the Government's pension jigsaw are beginning to come together. The state can no longer afford to pay proper pensions out of tax revenues, companies are increasingly reluctant to guarantee pensions linked to length of service and final salary and final-salary pensions are only suitable for the tiny minority of people who stay with the same employer for life.

The next best thing is a private-sector pension plan which invests in shares to capture faster long-term growth, but switches individual pension pots progressively over time into inflation-proof investments such as index-linked government stock so that people reaching retirement in a stock market slump do not suffer unduly.

These plans must be flexible, so that individuals can increase, decrease or even suspend their payments to adjust to job changes and periods of unemployment without suffering penalties.

Above all the next generation of pension plans must all be comprehensible and jargon-free, and the charges must be clear, fair and spread evenly throughout the life of the pension plan. All those little tricks which exploit investors in conventional personal pension plans and discourage workers from paying for a pension must be swept away.

Bid-offer spreads which deduct up to 5 per cent from the funds invested, allocation rates of less than 100 per cent of the contributions, charges which eat up large chunks of the contributions in the early years of a plan, penalty charges on transfers of funds to other plans, and the shabby practice of charging investors who, when they reach retirement, want to buy their actual pension from a company which offers a better annuity rate should all be abolished.

In a perfect world all employers ought to have pension plans for their employees, even if they are unwilling to link them to actual earnings, and they should be willing to contribute as much to a personal pension of the employee's choice as they would to a company scheme.

But this is not a perfect world. This Government is unlikely to compel employers to have pension schemes and the best we can hope for is a minimum wage sufficient to allow poorly paid employees to start a plan, perhaps with extra tax breaks, and a requirement on employers with company schemes to contribute to personal pension schemes if employees prefer them.

The Government also has an obligation to provide pensions for those who are unemployed for long periods, and for those who cannot take paid employment because they are bringing up families or caring for relatives. At the very least they should be allowed to contribute to pensions out of benefits or unearned income. The confusing Inland Revenue rules on who can contribute to what sort of pension and how much also need simplifying and standardising.

We need a far-sighted government to lay down minimum standards for a cheap and cheerful universal pension which will stand the test of time. We cannot afford a re-run of the personal pension fiasco in the late eighties when loose drafting allowed commission-hungry salesmen to sell personal pensions to several million people who should have stayed in employer schemes.

We also need a government that will give the next generation of pensions a fair wind. We cannot afford another raid by the Chancellor on the pensions piggy-bank.

Abolishing ACT credits may have cleared the decks, but another raid on this tempting target would do as much damage to investor confidence as the Maxwell fiasco and the mis-selling scandals.

And we do need to know what the long-term tax treatment of pension contributions would be. In particular there is a strong case either for retaining tax relief on contributions as an incentive to contribute, or making pension funds part of an individual's estate if they fail to live long enough to enjoy the pension they have paid for.