Monstrously messy | State pension proposals

The Tony Blair Institute recently announced its proposals for reform of the state pension. Citywire asked a number of IFAs for their thoughts, including two of our planners, Alice Sanders and Ed Slater.

This article was published by Citywire New Model Adviser on Friday 1st May.

‘Monstrously messy:’ IFAs on Tony Blair think-tank state pension reform

While seeing some benefits, advisers have warned against the ‘complex’ proposals outlined in the Institute’s plan.

The Tony Blair Institute (TBI) has unveiled a plan to replace the UK’s pension system with a digital-first ‘Lifespan Fund,’ effectively turning the state pension into a personal, flexible bank account managed via a smartphone app.

The think tank’s proposal would see the end of the fixed state pension age (SPA) and the triple lock, replacing them with a system that uses NHS data records to determine individual retirement dates and allows workers to ‘borrow’ from their future selves to fund mid-career breaks.

By using NHS records, the system would identify those in poor health or with lower life expectancies, often those from lower-income backgrounds, and allow them to access their pension earlier than their healthier, often wealthier peers.

Greg Moss, founder of Eleven.2 Financial Planning, told Citywire: ‘I think state pensions do need radical reform of some description, there are some obviously correct things in the proposal like removing the triple lock, replacing it with a more straightforward earnings link.

‘It’s crazy that the triple lock still exists in its current form, so that is a straightforwardly good thing I think. It’s clearly wrong that the [current] system has a cross-subsidy in favour of wealthier people generally who have longer lives and better health.’

But he questioned the Institute’s plans to predict life expectancy through health records.

‘Ultimately you’re talking about trying to underwrite the entire population of the country in terms of their life expectancy, which just seems monstrously bureaucratic and messy,’ Moss warned.

Under the plans, the ‘Lifespan App’ would become the central interface for every UK citizen’s retirement planning. Linked to national insurance (NI) and digital health records, the app would allow users to draw down approximately £12,500 a year to cover specific life events, such as the first six months of starting a business, caring for children under three, or periods of retraining.

Instead of years of service, workers would build a balance worth around £250,000 over a lifetime.

As users approach retirement, the app would then combine their NHS health data with mortality models to show exactly how much annual income they would receive if they retired ‘today’ versus in five years.

‘The Tony Blair Institute’s proposal is a good document to kickstart a discussion on much-needed consistency in retirement planning’, Eddie Grant, non-executive director at the Personal Finance Society, told Citywire.

‘I don’t think it should just be a state-only conversation, I think it should also be about how can the private sector and the private pension sector be allowed to actually help in this matter.’ Grant said.

The TBI is pitching a ‘multi-stage’ life model where the state pension is no longer a ‘fixed end-of-life benefit’ but a lifetime safety net.

However, the flexibility comes with strict fiscal guardrails. Those who draw down funds early for childcare or unemployment would be automatically enrolled in higher national insurance contributions upon returning to work to ‘refill’ their fund.

A ‘minimum balance’ rule would prevent young workers from draining their pots too early, for example, someone aged 55 would be required to hold at least 10 years of entitlement in their fund before being allowed to access it.

Ed Slater, chartered financial planner at Connor Broadley, said the flexibility offered in the proposal could fit well with the ‘modern career’ given recent changes to work patterns but noted that a simpler plan was needed.

‘This proposal sounds complex and could be confusing. Early access could also jeopardise retirement. Removal of the triple lock may be more sustainable from a funding perspective, but this could lead to worse pensioner outcomes, especially following higher periods of inflation.

‘I think the proposal highlights some positive ideas, but I wonder whether this might over-complicate matters, as is often the case with changes to pension legislation,’ Slater told Citywire.

Alice Sanders, also a chartered financial planner at Connor Broadley, echoed Slater’s concerns about an over-complicated system, especially given what she described as ‘a pretty straightforward’ state pension system that is currently in place.