Malcolm McLean: Better state pension would fix Britain's savings crisis Recent plans by our government to reform the state pension have much to commend in terms of making it simpler and more understandable. But the new pension at a little over £7,500 a year will still fall short of providing much of a buffer above the poverty line (as measured by the pension credit threshold). It will also in the longer term as a single-tier pension be less generous for many if not most of today's younger generation and will almost certainly be paid at later ages - possibly not until age 70 or even later in the fullness of time. On the private pensions front, securing better value for money from private pension products is now starting to come under greater scrutiny with particular emphasis on fees and charges. The biggest concern, however, has to be in the area of annuity purchase - now the likely end product of most workplace and personal pension arrangements, but with major question marks as to its suitability. With annuity rates at about 6pc (at best), some of the income received is a return of capital, not an investment return. In fact, a pensioner who buys a best-buy annuity at the age of 65 has to live beyond 82 until he or she makes any investment return at all - until that age they are just getting the original capital back. You have to live to 88 for your returns to equal inflation, which stands at 2.9pc. In real terms, you will lose money on your annuity investment if you die before then. And apart from the poor value of the product itself there are also concerns about the inbuilt and largely secret profit margins of the annuity providers as well as the role of annuity brokers and other "non-advised" services. The fact that taking an annuity is a once and for all decision makes it critically important that the 400,000 people who buy an annuity every year get it right and yet we know for a fact so many of them do not do so. This is a quite scandalous state of affairs which has to change if we expect consumers to put their hard earned money into a pension plan over a period of years with such a little return. In fact we may be at the stage now or at least in the very near future where a more radical approach to pension policy across the board needs to be contemplated. The ideal scenario in my opinion is one where as a starting point the Government takes responsibility for ensuring that the vast majority of people reaching their retirement age have an income from the state pension which on its own not only lifts them above the poverty line but does so with a sufficient margin to enable them to enjoy at least a basic standard of living throughout the rest of their retirement years. Provided it is made clear what that means for them it will then be down to individuals to decide on an entirely voluntary basis whether that standard of living will be sufficient and, if not, whether they want to and can supplement it with their own private saving to improve their financial position even further. This requires a bigger state pension than we have at present or as is proposed under the single-tier plans from 2016 - perhaps somewhere in the region of £10,000 per annum at the full rate. This could conceivably be achieved by a combination of means. Firstly and most significantly all tax reliefs on private pension plans would be abolished and the money saved channelled into the new state pension. The prime purpose of the Government allowing tax relief on pension contributions is to stimulate and incentivise saving into private pension schemes. But as the Pensions Policy Institute has recently pointed out pension tax relief is both expensive and poorly targeted and better use could be made of the money. It estimated tax relief on private pensions is more than £35bn or 2.2pc of GDP. The net cost of tax relief is estimated to be more than £23bn or 1.5pc of GDP. It is regressive, in that it tends to benefit higher and top rate taxpayers more, is not readily understood or appreciated by the general public and its withdrawal on its own would be unlikely to have a detrimental effect on people's willingness to participate in a pensions savings scheme. So, why not make better use of this large resource and put it into the state pension instead? Further savings could also be made to augment the state pension by a merger of national insurance and tax, not least in the savings in administrative costs of running two systems side by side for very little purpose. Tax and employment records could be used as a basis for establishing entitlement to the state pension and other social security benefits (as is currently the case with, for example, maternity benefit). The system of credits would continue as now as tax credits rather than National Insurance credits. The scrapping of pension tax relief in return for a bigger state pension would mean that contributions would be assumed to have been made from already taxed income and it would not be necessary for the Government to insist as part of the deal that savers use at least part of their pension saving to either buy an annuity or set up an income drawdown arrangement - effectively the position at the moment. The whole of the pension pot could then be taken in cash if desired on a similar basis to that of an Isa, tax-free at the point of payment albeit with a requirement that the fund was not drawn upon under a minimum pension age. Auto-enrolment would continue as now without employees" tax relief but still with compulsory contributions from employers to support those of individuals who have chosen not to opt-out of the scheme. Annuities would continue to be available for those who wanted them as a hedge against their or their spouses living a long life (possibly the only good reason for taking out an annuity on the present poor rates) but they would not be forced to do so and would be encouraged to seek professional advice in all cases. Although these proposals would represent a significant change in direction on current Government policy I believe they could be cost effective and would undoubtedly be popular with consumers. If nothing else they would help to simplify a system which baffles and confuses most people outside the pensions industry itself. Understanding and explaining tax reliefs, annuity purchase and income drawdown are complications most of us could live without. That alone might help to stimulate and encourage pension saving. And a meaningful and more generous state pension is something surely most of us after a lifetime of work are entitled to expect. Being only one-up from Mexico is something we can and should improve upon but if that is to be achieved in the face of a rapidly ageing society and a growing savings gap more radical solutions will have to be considered. Whether the Government is willing and able to do so remains to be seen. Malcolm McLean is a consultant at Barnett Waddingham and a former chief executive of the government-funded Pensions Advisory Service