I have just reading about a new pension scheme that has been developed in the USA and it got me thinking about just how complicated our pensions still are – despite so-called simplification three and a half years ago. And they are just about to get even more so, with the introduction, between 2012 and 2016 of the new work-place based Personal Accounts.

The new US arrangement is a hybrid of their existing 401k regime, which is so much more flexible than our system, and a 'light' version of the defined benefit scheme; the type that is based on earnings, not contributions (and which employers are abandoning at a rate of knots because the financial liability is too onerous).

What is wrong with pensions here?
Apart from being subject to highly complex rules relating to contributions, investment options and benefits – with more complications to come as those with incomes of £150,000 a year or more lose higher-rate tax relief from April – UK pensions are inaccessible before age 50 (it will be 55 from 6th April 2010) even in case of need. By contrast, 401k pensions can be accessed for special purposes much earlier, if needed.

What is the problem?
Unfortunately, as a nation, we are still not saving sufficient to retire on. In fact the basic state pension simply cannot cope and the age at which it will be available is being put back to 68 in stages from 2024, because it is too expensive for national insurance contribution payers, as it currently stands. The number of workers, compared with the number needing pension (and other) benefits, is falling.

This is also why the Second State Pension is being altered from an income-related amount to a level basis (although employees will still pay more the more they earn; they will simply not benefit from higher pensions).

Will Personal Accounts not help?
Personal Accounts would in theory help people receive a more generous income in retirement. The problem is that smaller employers – those who are less likely currently to be offering occupational pensions – will not have to start the scheme until 2016, so few people will see the benefit for some time.

In any event, those on very low incomes are likely to suffer a reduction in means-tested pension credit, and possibly other benefits, when they retire, as the result of having a Personal Account that they have paid for.

What is the solution?
Pensions still need to be made easier to understand; and the government needs to remove some of the restrictions and complexities they have introduced since April 2006. These include (effective) limits on:

• Contributions;
• Investment options;
• Fund sizes; and
• How and when benefits are taken.

What should replace the existing rules is a simple regime that encourages people to build up the maximum fund possible and then draw benefits at will. (In fact, given the right professional advice, this can almost be achieved already.)

As ever, when it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do contact Robert Bruce Associates for individual assistance.

NOTHING IN THIS ARTICLE SHOULD BE SEEN AS GIVING INDIVIDUAL FINANCIAL ADVICE.