New pension incentives? Don’t bother with the young – help the 50-somethings first

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Young people have better things to do with their money then save for a pension

All pension tax reliefs are under review all the time, that’s pretty clear. And for a government in fiscal distress, it makes sense.

Pension tax relief is expensive in the short term. However, as the state also knows, having a population with horribly inadequate pension savings is rather more expensive in the longer term. So all reforms must encourage people to save from a young age, and to keep saving.

Enter Hargreaves Lansdown, which seems to have been working with the Treasury on a list of proposals to help make this happen.

Some are good (a flat £20,000 annual allowance regardless of income, for example). I’ll come back to these another time, but the most eye catching one is not good at all. It is to change the government top-up system so that it is no longer linked to income (ie you get your tax back on pension contributions regardless of the rate you pay) but to age.

This, says Hargreaves Lansdown, would be achieved by “a government top up of 100 minus an individual’s age: a 25 year old would receive a top up of £75 for every £100 they invest; a 50 year old would receive a top up of £50 for every £100 they invest.”

This sounds marvellous. It would motivate the young to save. It would help everyone make more use of the miracle of compounding. It would put some very long-term money into the stockmarket  and it would “correct some of the intergenerational imbalances that have developed in society.” But it isn’t.

The key point here is that the young don’t tend to save much. They never have (this isn’t new). That’s partly because they don’t want to (65 is impossible to see when you are 25 however you are incentivised to see it). But it is mainly because they can’t afford to: they have traveling to do, rent to pay, houses to think about and children to bring up.

The truth is that most people can only really start to save in their 40s and only do so in reasonable volume in their 50s. So, giving these huge top ups to those in their 20s (mainly with taxes paid by those in their 50s) is nuts. It will benefit the average 20-something in no way at all, while giving a whopper of a boost to the few 20-somethings who either inherit cash early or have parents who can take advantage of the insanely generous tax incentives it would create on their behalf. No shift to greater equality likely there.

At the same time, it would discriminate against the people who really need help – and fast: those without defined-benefit pensions now hitting their late 40s and 50s and desperately trying to play pension catch-up. These are the people we should be figuring out how to help.

The time to give people a real incentive to save is surely when they can actually afford to do so. Help the people who both want to play catch up and actually can play catch up. Anything else is just pointless posturing.