At one of our conferences last year, a panel session on consumer engagement in pensions went off into familiar arguments on the importance of financial education when a journalist said existing parts of the curriculum should make way for more education on money, economics and pensions. I’ve heard this plenty of times before, usually made with unromantic suggestion that anything not seen as being directly beneficial to future employees or the economy gets the chop – for example English literature (DCMS estimated the GVA of UK publishing at £10.2bn in 2014) or art (which contributes £7.7bn to the UK economy according to the CEBR). But this journalist threw out an unusual suggestion: trigonometry. He said it can’t be used in the workplace, so why is it taught in schools? Well, I’m sure all of the architects, statisticians, financial analysts, mechanical engineers, civil engineers, medical imaging professionals, astronomers, seismologists and land surveyors who depend on it are glad that it was taught to them.
But regardless of what we would leave out of the school day to learn about pensions (imagine how thrilled the children and young adults would be), the issue of financial education – and in particular understanding of pensions – is a real one and something we keep returning to. It is, however, only half the story. I agreed with our Chair, Lesley Williams, when last October she told our Annual Conference that complexity in the pensions system is equally important to get to grips with. And we’re all responsible – Government, regulators, providers, schemes, asset managers, administrators, even your trade association. People don’t understand pensions, many don’t appreciate the benefits of saving in one, and young people would rather save for a home; and for those reasons (and perhaps not because of the way tax relief is distributed) the powerful incentive to save in a pension can be blurred.
Enter the Lifetime ISA or LISA, the Chancellor’s response to “no consensus” on tax reform. He said people like ISAs because they’re simple (true) and people under 40 have been let down by the pensions system (not necessarily true, given that auto-enrolment opt-out rates are lowest among young people). And with LISA, you get a Government bonus that looks like a 20% flat rate of tax relief on your contributions to help boost your retirement savings for age 60+ or your first home deposit.
It’s good. There’s no denying it. It’s simple and flexible and we welcome it – we are the Pensions and Lifetime Savings Association, after all. For basic rate taxpayers it could even work out marginally better than a pension provided they save the full amount possible. But it’s only great if you don’t understand pensions and don’t appreciate that your employer will also give you money if you save in one. There are also exit charges (unpopular in pensions!) if you want the cash for anything other than a first home, retirement or terminal illness. For higher rate taxpayers who expect to become basic rate taxpayers in retirement, it’s better to save in a pension. And that includes many architects, statisticians, financial analysts, mechanical engineers etc etc.
For now, we’re still a year from the LISA being available and there is still plenty to work out, not least how to govern LISAs in savers’ interests and how LISA funds should be invested to bridge their dual-term savings aims to build both a deposit and a retirement fund. And there is the question of just how the LISA fits alongside auto-enrolment in the Government’s pensions and savings strategy.
Assuming it has one, that is. Which is why we’re not the only organisation calling again for a new independent retirement savings commission to put savers’ interests at the heart of long-term thinking on pensions and savings. Because to making saving more attractive, to make pensions and other products more understandable and more widely-used, we have to give savers and employers a clear and coherent system that, maybe with a little education, they can get their heads around. A bit like trigonometry.