There is not a single country in the world that has a “first class” pension system, according to the Melbourne Mercer Global Pension Index. Some were once first class, but thanks to low economic growth and an ageing population are now in need of improvement (Denmark and the Netherlands); most are barely adequate; and some are utterly unsustainable (Japan, Italy). The UK doesn’t come out too badly. We get a C+ (Denmark gets a B+) and our sustainability ratio is just under 50% (see Mercer.com.au for how the numbers are calculated) against 38% in France and China, 40% in Germany, and 16% in Italy.
There is however a very long way to go if we want to move up to B+ level. Mercer says we should accelerate the rises in our state pension age; increase the minimum pension payable to the poor; bump up auto-enrolment both in terms of the amount we have people pay in and the number of people covered; and finally restore the requirement that some part of all private-pension provision must come as guaranteed income.
The first bits will all make sense to you – my guess is that delaying payment to people of what we should now consider working age (up to 70?), encouraging most people to save more and bumping up payments to those who have not been able to save wouldn’t be particularly controversial moves. But the last would reverse the best-loved bit of pensions freedom – the right for anyone over 55 to draw down their saved up pension cash as and when they like.
This matters because Philip Hammond has let it be known that he is planning a “bold” Budget later this month. Might he raise the drawdown age? It hardly makes sense for the UK to be drawing its pension at 55 when most of us will live to 87. Might he change our drawdown rights? He could ask that everyone prove they can create an income equal to the basic pension credit (around £160) before they draw down. Might he aim to nudge more into saving by taking tax breaks from the high earning to subsidise the contributions of the low earning? Industry chatter suggests he is looking at a flat-rate relief system again.
We will know soon. But the fact that we have all these conversations about pension changes at MoneyWeek before every Budget is a reminder that you do not control your pension. The price of the tax relief you have banked is that the government gets to say when and how you can use it. That’s why, if you want your personal retirement system to be an A+ one, your investments should be diversified across not just asset classes but investment accounts. If Hammond shifts the access age from 55 to, say, 60, you might wish you’d saved more into your Isas and less into your pension.