The Chancellor's Budget decision to treat pension savers as responsible adults and let them choose how to spend or invest their own pension pots on retirement – instead of being forced to convert them into annuities (or follow hugely complicated drawdown rules) – is surely welcome. But our pension system is such a mess that there is a lot more work to do.
On private pensions, for example, we need to stop fretting about 'tax relief'. The use of the phrase 'tax relief' suggests that somehow the great taxpaying public is subsidising pension savers, and it has been used to make the case that upper-rate taxpayers should not get upper-rate relief on their contributions. This is a complete misconception. When the rules were introduced decades ago, the principle was clear. If you actually drew your income, you paid tax on it. But if you did not draw your income at the time, but 'deferred' taking it until you retired, it was thought fair that you should only pay tax on it then. So it's not a subsidy – simply deferring the tax until the income is actually enjoyed.
Second, the contribution rules must be much simpler. Right now, how much you can contribute to a pension fund depends on your age and status. And thanks to Gordon Brown, there are limits on how much you can have in your pension pot before you start getting clobbered with a huge tax. The argument is that the special tax treatment is there just to make sure that pension savers have enough to live on, without having to fall back on welfare – not to help millionaires build up millions more in pensions pots. But in fact it is just a way of the Treasury saving money – money it regards as its own, rather than belonging to taxpayers like you and me. Scrap the lot and forget it.
Third, Gordon Brown (again) effectively killed off workplace pensions by over-regulating them. Sure, you need some regulation to make sure that company pension plans are well managed, but Before Brown the UK had more private pension savings than the rest of the EU put together. Now, workplace pensions are almost non-existent. The new 'people's pension' arrangement is an attempt to re-build that. Too little too late – and just another layer of rules and complexity on an already densely-stratified set of regulations.
Then there are state pensions. Current (tax) contributions go straight out to current beneficiaries. It's a pure Ponzi scheme – you just have to hope that some even bigger mug will be willing to pay in when you get to the drawing-out stage. If private-sector rules applied, Iain Duncan Smith and George Osborne would be in the slammer. When the system was introduced, the government was supposed to build up a proper fund to pay out future pensions, but (like America's too) it was never more than a fig-leaf for the fraud.
It's tough, but at some point we need to move to properly funded personal pension accounts, as Chile did in the 1980s (with many other countries following suit). Oblige people to earmark some of their earnings for pensions, by all means – but let them put it into an account that they control, rather than the Treasury black hole. Few young people today think they will ever get a meaningful pension from the state, and they are right. Again, maybe the Chancellor should do the right thing, and trust the people.