Being able to congratulate the FCA, while not by any means a first, is not something I am able to do regularly.
It is therefore a real pleasure for me to offer my congratulations on its recent paper: “The Ageing Population and Financial Services".
Indeed, I would go as far as to say it is possibly one of the most important pieces of research and comment the regulator has produced, and one which is an invaluable addition to the debate about how modern society will face the many issues that result from the rapid increase in the country’s elderly population.
The Paper’s weakness, however, is that because of the FCA’s particular remit from the government, when it comes to solutions it is forced to focus almost entirely on the part financial services firms have to play in meeting the needs of the nation’s elderly.
Furthermore, it has an emphasis on the avoidance or mitigation of potential harm which, while obviously an important and desirable objective of both the FCA and the financial services sector, will not itself address the fundamental problems at the heart of the growing crisis facing the elderly.
If we, as a society, are to really tackle the challenge of the increasing numbers of the UK population who are elderly, we need joined up thinking across the government.
The looming crisis in care for the elderly needs to be built on a political consensus so that the fundamentals of the solutions are not rejigged every few years as the complexion of the government changes.
The first objective must be to encourage and enable far more people to adequately prepare during their productive lifetime for their financial needs in retirement. This will call for a long-term process of consumer education to increase the public’s understanding and awareness of what they will need when they retire.
This will then require a supportive tax and savings regime, which will enable a greater number of people to achieve the savings they will need to maintain their standard of living in later life.
The paper advocates small, but meaningful steps, such as the Pensions Dashboard, the simplification of the rules around later life, mortgages and equity release, all of which will be helpful; however, determined action by the government is essential if the radical solutions needed to make a real difference are to happen.
The bottom line is that, leaving aside the issue of health, there are few problems faced by the elderly that are not much easier to solve if they have adequate income or capital. In reality, as the last 20 years have witnessed the demise of most non-government defined benefit schemes, we are talking about capital accumulated through, in all probability, a lifetime of savings.
The second objective must be to develop a co-ordinated social care policy across the NHS and social services that ensures society as a whole meets its moral obligation to care for those unable to care for themselves.
This will again take a combination of time and new ideas to bring the level of care for those who the Paper describes as the ‘old, old’ up to the standard that we as a society should aspire to for our elderly citizens.
Clearly, these are massive issues which will not be solved either by the FCA or the financial services sector on their own. What is needed is a determined commitment and co-ordinated action plan from the government.
Indeed, I would go further and say the looming crisis in care for the elderly needs to be built on a political consensus so that the fundamentals of the solutions are not rejigged every few years as the complexion of the government changes.
Obviously, each party is entitled to focus on the particular care and tax policies they favour, however if these changes of emphasis are built on an agreed foundation, the likelihood of disruption is reduced and the certainty of individuals achieving the objectives is increased.
Unfortunately, in my view, the most recent political initiative in this area, “Pension Freedoms”, will have the directly opposite effect, as it will significantly reduce the retirement income of a great many pensioners, therefore making the long-term problems worse rather than better.
I say this, not because I am against the principle of Pension Freedom - quite the reverse. However I do believe that a good concept, access to one’s pension fund, has been devalued by permitting access at the wrong age.
The importance of tax incentives to encourage the long-term saving habits that building an adequate retirement fund cannot be overstated. By this I do not mean continuing with what I believe is the nonsense of higher rate tax relief. This was all set to be abolished three years ago. Yet I believe we will see the end of higher rate tax relief in the Autumn Budget.
I think granting pension access at age 55 is too young and it should be changed to the state retirement age, or a person’s normal retirement date, should it be markedly different.
The problem of early access is that it is virtually impossible for someone to visualise their needs at retirement 10 years before it becomes a reality.
To put it simply, at 55 they will not have their retirement head on, whereas at retirement how they are going to maintain their quality of life in the coming years is the absolute focus of their attention. There are two other major benefits of delaying access until retirement.
The first is that allowing the funds to accumulate in a tax free environment, for perhaps a further 10 years or more, will dramatically increase the funds available at retirement. Secondly, through consumer education and the financial services sector in general, the knowledge that access will be available at retirement will encourage clients to save significantly more throughout their working lives than would otherwise be the case.
This in turn will lead to improved incomes and the resulting quality of life than would otherwise be the case and be a vital step towards addressing the issues of the aging population raised in the FCA’s paper.
Ken Davy is chairman of The SimplyBiz Group