The government's proposals on pension reform make sense, but they mean young people
need to save more - and there's also a sizeable group who will lose out.
The government's White Paper follows the Turner Commission proposals pretty closely.
The government proposes to link the state OAP to earnings instead of prices, and
amalgamate the State Second Pension (S2P) into the OAP. The flat-rate OAP will end
up at £110 per week for single person (the same as today's means-tested Minimum
Income Guarantee), increasing in line with earnings.
Make your own plans for retirement... don't put it off
Want big benefits? Stump up big money...
In the long run this will prevent a big rise in the proportion of pensioners on
means-tested benefits, but even with these proposals, a third of pensioners will be
means-tested in 30 years' time, so by the standards of other European nations -
almost all of which pay a flat-rate state pension people can live on without needing
means-tested benefits - Britain still looks like a third world country.
To which Gordon Brown would no doubt respond that most European countries are heading
for a real pensions crisis because their spending on pensions, already higher than
Britain's 5% of GDP, will soar to unaffordable levels unless benefits are cut or
taxes raised.
Arrange a free pension consultation today
A right mess
Underlying Britain's own 'pensions crisis' is the breakdown of the implicit bargain
struck back in the 1970s: the state would provide a subsistence pension and employers
would run good occupational schemes that would top up workers' retirement incomes.
This pact broke down because of many changes, most important being women (in the original
pact seen as passive recipients of husband's pension rights but now independent) are
heavily penalized by the National Insurance contributions rules and so end up with far
lower state pension entitlements than men.
'Good' occupational pension schemes providing target incomes of two-thirds of salary have
been closing to new entrants at an accelerating rate for the past decade. We are all living
far longer than anyone anticipated even 30 years ago. The system has grown so complicated
that it deters people from even trying to make sensible decisions.
Make your own plans for retirement... don't put it off
Higher costs for employers... lower wages for employees
The white paper reforms deal with women's poor position by reforming the contribution rules.
They deal with the problem of means testing by reforming S2P and linking the OAP to earnings.
They partially deal with insufficient savings by creating a default pension scheme, the
National Pensions Saving Scheme, into which employees will be automatically enrolled.
Employers will contribute 3% of earnings, employees 4% and the Treasury (through tax relief) 1%.
The NPSS plus the flat-rate state pension, though, will only produce a pension income of
about 45% - 50% of average pre-retirement earnings. So anyone wanting a comfortable retirement
will have to save more.
Arrange a free pension consultation today
There's a hand in your pocket
And there is a sting for people under 40 with high earnings. The conversion of the S2P to a flat
rate basis means higher earners, whose NI contributions currently earn a proportion of eligible
earnings as extra pension, will not in fact get anything back for their extra contributions.
If Gordon Brown was honest, he would admit that this is just another piece of old-fashioned
socialism whereby richer workers are taxed to pay for poorer workers' benefits, but because S2P
is so complicated, many of those who suffer from this reform probably won't even realize it, so
he's likely to get away with it.
And to be honest I personally wouldn't fancy the task of working out exactly how much any individual
would lose, for the same reason, but in theory - on the present basis of S2P - it could be £30 or
more per week. That's quite a piece of pickpocketing.
Make your own plans for retirement... don't put it off
Contract-out now while you still can
Anyway, as I said last year, the fact that you can take 25% of the fund you build up from putting
'contracted out' NI rebates into your own savings pot as tax-free cash has already made contracting
out of S2P more attractive for people aged under 45.
If you assume the white paper reforms will become law, they are another good reason to contract out
of S2P while you are still allowed to - for once the reforms take effect, probably in 2012, contracting
out will be abolished, probably because by then too many people will have worked out that they would
be better off doing so.
Arrange a free pension consultation today
Still too complicated
In line with Turner's proposals, the reforms are gradualist and in fact take over 30 years to work through.
But the result is that we are stuck with the awful current means-testing regime (requiring the employment
of thousands of benefit consultants visiting old people to talk them through the forms) and a lot of the
complexity of S2P for years to come.
It looks as if the Conservatives and the LibDems support the proposals in general, which says a lot about
their inability to formulate radical policies that really do make a difference.
The proposed rise in state pension age to 66 in 2024 is a realistic response to us all living longer.
But if this is public policy, surely it must be applied in an even-handed way, so more of us must
ask our MPs why public sector workers can still retire at 60 on
pensions largely paid for by taxpayers.
Make your own plans for retirement... don't put it off
How to bridge a big savings gap
If you start saving for retirement in your 20s, a constant 10% of earnings should be enough to provide around
two-thirds of pre-retirement earnings. In your 30s, it needs to be 15%, and if you don't start till your 40s
around 25%. This is the amount needed to accumulate a fund that together with the state pension will deliver
two-thirds of pre-retirement earnings.
But the truth is that only an idiot would put all their retirement savings into pension plans that - as we
have seen twice in the past decade- can be eroded, damaged or simply nicked by the government. The official
figures will always show a 'pension savings crisis,' because few of us are stupid enough to risk all our
money in this way.
So while I will never go along with the financial services industry's terror campaigns designed to encourage
you to buy pension plans, I do believe you must have a long-term savings strategy and one of its aims must
be to provide a sufficient retirement income.
It's a topic I'll be returning to in coming months.
Arrange a free pension consultation today
<
