Why are pensions so difficult? The concept of saving for old age is hardly tough to grasp, and few would argue with a policy of financial incentives to encourage thrift. Yet we have created a tax avoider’s paradise which helps the better-paid more than the poor, with a cat’s-cradle of rules, and where ignorance of what might produce a pension big enough to live on is almost universal.

Now Cameron & Clegg, thrashing about for something they can agree on in 2013, have stumbled on the idea of an overhaul of the way the country looks after its oldies. They have rustled up a white paper for the new year, to include a commitment to raise the retirement age as life expectancy increases.

Next month’s paper will focus on the state pension, proposing a flat rate payment for all. If the forest of supplementary benefits is chopped down, this is supposed to be revenue neutral, although since new benefits will doubtless spring up during the passage of any bill, this is a pretty heroic assumption.

Rather, the paper should ask a basic question: how to frame incentives to encourage the greatest number to minimise their dependence on the state in old age. The central weakness of the current system is the assumption that those who are paid the most somehow need the most in retirement. Those who are paid the least, and for whom any sort of saving means a real sacrifice, are assumed to need the least. In 2009, a quarter of the total tax relief went to the top 1.5per cent of contributors.

This tax relief is hugely expensive for the exchequer. It’s also worth twice as much per pound to a higher rate taxpayer than to someone on the basic rate. Adding in the National Insurance (employer’s and employees’) avoided, the cost in 2008 was £36bn. The most recent changes have clipped back the maximum that can be sheltered, but pensions remain a routine tax avoidance vehicle for higher earners.

New rules which are currently being introduced, obliging every employee to join a pension scheme unless they opt out at the start, will make things worse. The lower-paid will see a 3per cent cut in take-home pay, and the illusion that saving 8per cent of their salary will somehow give them a comfortable retirement. Their employers find the cost of employment going up by 4per cent (unless they already run a more generous scheme, in which case they might quietly cut it back and hope nobody notices).

So what’s to be done? The answer is the BOGOF pension, where every pound saved into a special account is matched by a pound from the state, with every adult under 65 eligible to contribute, regardless of whether they are working. The cost would be met by scrapping all tax relief on future pension contributions, whether by employer or employee. Even so, Bogof is so expensive that each year’s contribution would have to be capped.

We’re told that a decent pension requires us to save a quarter of our income every year. The Budget would set the cap every year, but 25 per cent of today’s national average wage, £25,000, produces a maximum payment of £3,125. Add in the state’s contribution, and a couple could see £12,500 a year flowing into their Bogof account. Savings could be taken out at any time, but the state would
This is an updated version of Saturday’s FT column.also take back its pound, which it would not replace. The account would mature at age 70, and earlier death would leave the assets in the estate.

This concentrates the incentives on the lower-paid, the reverse of today’s position. It might even attract cross-party support, lending some much-needed stability to the framework for long-term savings, although the public sector unions would fight, since their precious final-salary schemes would have to close or be taxed. All those in defined benefit schemes would be tested annually to see whether the accrued value of their entitlement exceeded that year’s cap. Any excess would be taxed as a benefit in kind. This calculation would also serve to highlight just how much a final-salary scheme is worth to long-serving employees.

Senior civil servants, for example, might find that promotion actually cut their take-home pay, thanks to the rising value of their index-linked pension entitlement. They would have to choose between more money now and more later. Rather like most of the people they are supposed to serve, in fact.