Pensioners could see their income boosted by a third if the Government consented to a radical shake-up of Britain’s pension system.
That’s according to a new report from respected charity Royal Society for the encouragement of Arts, Manufactures and Commerce (The RSA).
Adopting the type of pension scheme used in fellow European countries such as Holland and Denmark would also give workers greater certainty about their retirement income, say the RSA.
The RSA have called on the Government to encourage the establishment of “collective” pension schemes.
Currently, members of company pension schemes in Britain amass their own separate savings pots. They are then converted into an income at retirement – normally through the purchase of an annuity.
By contrast, the aforementioned ‘collective schemes’, which are popular not only in the Netherlands and Denmark but also parts of North America, have one large fund into which all members pay. Those members then receive their pension income from the same fund, so they can benefit from investment growth even after retirement. This does not happen when the income comes from an annuity.
The research, commissioned by the RSA and carried out by pensions consultancy Aon Hewitt, suggests that a collective pension would on average have outperformed an individual pension by 33 per cent over the past 57 years.
According to the research, further statistics show that a collective pension would have outperformed an individual pension in 37 of those years, and therefore the risk the saver would have taken would have been lower.
“It is unacceptable that these more effective pensions, which are available to Dutch and Danish citizens, are effectively illegal in this country,” the RSA said. “British pensioners should not become the poor man of Europe.”
The RSA also warned that with generous final salary pensions “withering away”, a new framework was urgently needed if people were to enjoy a good standard of living in retirement, adding that Britain’s retirement system would become little more than a “tax advantaged private savings plan” if the Government failed to act.