The State pension – how the low paid can end up subsidising the well-off

If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck; that is of course unless we are talking about the state pension.

Despite the fact many of us consider it part of our overall pensions saving plan and that we all contribute to it, the state pension is a blunt instrument that has no means of adapting to the varying circumstances of the individual.

Unlike other pension types, there is no flexibility to drawer earlier rather than later and there is no increase in benefits for those with a short life expectancy. The net effect of this is that those in some of the poorest places in the UK can end up subsidising those in the most well off. … Continue Reading

Will your pension support you for the rest of your life?

With average life expectancy at age 65 now about 82.4 years for men and 85 for women (ONS October 2009) and steadily increasing, anyone buying an annuity today faces some pretty tough decisions.

The annuity they are buying will be part of the income they will have to live off for the rest of their lives, which for those retiring at 65 will on average be 17.4 years for men and 20 years for women. All of whom will obviously hope and plan for it to be much longer and for many it will be.

So do you buy an annuity for life which pays the same amount, year after year, with no protection from the ravages of inflation, or do you opt for inflation-linking, which is prohibitively expensive?

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Welcome to the UK pensions saving casino

Picture a shabby casino whose lights are grubby and dim, making it tricky to get a clear view of what’s going on. There’s a sordid air about it, a palpable sense of despair at repeatedly handing over piles of cash only to end up empty-handed. A weary resignation pervades that, in reality, only the House ever wins.

This isn’t any old seedy rundown joint, though, it’s the UK pensions saving casino where most of its millions of working citizens must play if they want to build a lump sum big enough to provide a private pension in retirement.

Given the slow-burning national unease about inadequate pension provision, it might seem faintly ludicrous that the majority of today’s savers – bar those in final salary schemes – must take such a huge gamble with their money. … Continue Reading

Keeping on working – no more default retirement age

We should all have the opportunity to work longer; that is why the Government announced in the budget that it would abolish the Default Retirement Age (DRA). From April 2011 your employer will no longer be able to use the DRA to justify a compulsory retirement policy, so unless there are other good reasons they should not be able to force you to retire at 65.

In many ways this is sensible. The statistics back it up; overall people are living longer and healthier lives. The reality that many people’s pensions will not generate the hoped for returns means many people need to keep working longer. The fact the National Institute for Economic and Social Research (NIESR) calculates that extending average working lives by a year could increase GDP by 1% makes it a no brainer as far as the Government is concerned. And of course the fact that the state pension age is to be raised also makes it necessary for people to work longer.

For many this is welcome news, but for those with physically demanding jobs even working to the current retirement age of  65 may not be an option, it remains to be seen what the Government will do for them.

The Government has announced a consultation on this but it is restricted to;

1. Should the Government provide any additional support for individuals and employers in managing without the DRA or statutory retirement procedure?
2. Whether removal of the DRA could have unintended consequences for insured benefits and employee share plans?

The consultation is open until 21st October 2010.

If you would like to participate you can reply to this consultation online at www.surveymonkey.com/s/2VWVDND

A full copy of the consultation document and a response form is available at www.bis.gov.uk/retirement-age

Consumer voice missing from pension reviews

Over the last 20 years, there have been scores of  reviews, commissions and green papers, which have sought to “fix” the UK’s savings and pensions gap, whereby an estimated 7m adults are sleepwalking their way to retirement without making adequate provision for their old age.

In the 1990s, two eminent actuaries, Ron Amy and Tom Ross, undertook a review of the UK pensions system with the aim of designing a blue print to crack  the lack of saving for  retirement. The result? More pension reports and consultations.

Thinking of moving abroad when you retire?

There are many reasons why you might want to move abroad when you retire. It might be to join your children who have emigrated or you may have come to the UK and spent much of your working life here and want to move back home. Or you just might feel after all these years of working you deserve a change.

You have some savings and of course there is the state pension that you are entitled to, since you have worked and paid the required National Insurance contributions. And here is where it can all start to go wrong.

As long as you move to the EU or one of sixteen other designated countries then all will be fine. However move to anywhere else in the world and you will find that your basic state pension will remain frozen at the same rate as when you leave the country.

So whilst other pensioners in the UK, the EU and the other sixteen countries all receive the maximum of the increase in earnings, inflation as measured by the Consumer Price Index or 2.5 per cent; in ten, twenty or thirty years time you will be receiving  exactly the same amount as you received when you first moved abroad.

There are 1.1Million UK pensioners living abroad and 540,000 of these live in the 156 countries where they are not entitled to receive any increase in their basic state pension. They are represented by an organisation called the International Consortium of British Pensioners (ICBP). Who have gone to great lengths to get this absurd and unfair situation put right.

They also point out that this rule discourages and prevents people from moving abroad and that by rectifying the situation the Government may well actually save money through the reduction in health care and other benefit costs. This is an area they are currently working on and if you are a pensioner you can help them by completing their questionnaire by following this link. www.surveymonkey.com/s/frozenpensions

Who will benefit most from NEST?

Nest, the name for the proposed shake-up of Britain’s private pension provision, was the canniest of choices.

As well as a deliciously neat acronym for the National Employment Savings Trust, it exuded a kind of feathery, cosy comfort to reassure the nation’s pension savers that their cash was to be kept in a good home.

Yet the notion of a national nurturing homestead for the nation’s pension savings suddenly looks rather shaky, as a new Government has brought along a fresh pensions perspective with it.

The Con-Lib coalition has now set in train a review – launched by pensions ministers – of the proposed scheme that could expose its sclerotic conflicts and prompt a distorted rethink of whether savers can really benefit from compulsion to save. … Continue Reading

Should saving in a pension be mandatory?

In his speech announcing the launch of the Governments new pensions’ strategy Iain Duncan Smith was very clear that without working longer and saving more, many people will not receive an adequate pension when they retire.

The previous Government’s flagship NEST scheme, which was designed to resolve this issue and to enable the low paid to save for a pension. Has become more and more discredited as the details emerge and its future, in its currently proposed form, in doubt. It is no longer seen as the answer to the lack of pension’s savings.

However the one idea behind NEST that has gained traction is that of auto-enrolment. Within NEST all eligible employees would be auto-enrolled, but they would have the option to opt-out. This latest government review is aimed at taking this one step further and assessing whether mandatory enrolment into existing company pension schemes is the answer to increasing the Nation’s savings.

The review will be carry out by Paul Johnson of Frontier Economics, David Yeandle OBE of Engineering Employers Federation and Adrian Boulding of Legal and General Group PLC.

You will notice that there is no consumer champion to represent the savers here. In his speech announcing the review Iain Duncan Smith said “… the vast majority of people are either completely disengaged or utterly baffled by pensions. Maybe it is apathy, maybe it is remoteness in time; maybe it is the complexity; or a combination of all three.”

Or maybe Mr Smith it is because they are designed for them and not with them.

You can read more about the review including its terms of reference on the DWP web site – work place pension’s review

The aim is to publish the results of the review by 30th September 2010

Raising of the State Pension Age

On June 24^th the Government announced a call for evidence to help decide about when the state pension age should be increased to 66.

To see the effect that raising the state pension age can have on the ratio between those in work and those drawing a state pension see our article on the dependence ratio.

Currently the retirement ages are 60 for women and 65 for men. The current plans in place are to increase the retirement age for woman to 65 by 2020 and for both men and women to 66 by 2026. With other increases to 67 by 2036 and 68 by 2046. More details can be found on the Pensions Advisory Service web site.

The new Government has said that it will bring the start date that the state pension age starts to rise to 66 forward, but no sooner than 2016 for men and 2020 for women.

The call to evidence will run between 24/06/10 and 06/08/10, and contributions are invited from organisations and individuals who have information that is relevant to the timing of an increase in the state pension age to 66. Click here to see the call to evidence invitation. The review will be published this autumn.

Simple, safe and rewarding – is that too much to ask of a pension system?

As normal government work gets back underway, we continue to look closely for signs that savings will be put on the political agenda. At the end of last week we learnt that the new Pensions Minister, Steve Webb, will be conducting a review into NEST, the previous government’s flagship progam to create an affordable pension scheme available to all. This internal review will focus on looking at how the proposed NEST system will affect the lowest income workers, and whether they will really benefit from being auto-enrolled. We share the many concerns that it will in fact be to their detriment, as their rewards from saving may well be outweighed by the loss of means tested benefits available to them.

But any changes to personal savings policy must seek to enact attitudinal and behavioural changes that will enhance both the frequency and volume of savings. Whilst it is necessary to determine, comprehensively, the real impact that NEST will have on those auto-enrolled, any review should be more holistic in its approach. The last thing savers in the UK need now is yet more government tinkering with system. Constant government meddling and ad-hoc changes to both pensions and savings mechanisms are at the very heart of the problems we have in the system today. However, as Rt Hon Frank Field MP forewarned at our launch earlier this year, NEST could well become the next big pensions mis-selling scandal.

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