Government hopes pension change gets people saving

Saturday 9 June 2012

THE Government is on the verge of publishing its proposals for a new flat rate state pension, which one expert has called the biggest shake-up the state pension system has seen in the past 50 years.

ChANGING TIMES: Government retirement plans have not always been welcomed but most in the pensions industry support the forthcoming changes. Picture: Stewart Attwood

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HELEN PRIDHAM

The current system, where people receive an earnings- related pension on top of their basic state retirement pension was first introduced in 1961 as a graduated pension and was later replaced by Serps (the state earnings related pension), followed by the state second pension, as it is now known. This is being scrapped.

Steve Bee, of Paradigm Pensions, says: "It is reverting back to the system Beveridge wanted – a subsistence-level pension which is enough to keep you off means-tested benefit."The current basic state pension is £107.45 a week for a single person. However, there are means-tested benefits available on top of that. The Government provides a guarantee that no pensioners must live on less than the pension credit limit of £142.70 per week, or £217.90 if they are a couple.The problem with this guarantee is people who have a small amount of private pension provision are penalised in comparison to those who have saved nothing at all because their means-tested benefits are reduced. Mr Bee said: "They are effectively losing 40p in the pound. That is the real 'granny tax' which the Government is now abolishing."What the Government wants to do is to ensure that when it introduces auto-enrolment for employees into company pension schemes, which will start to roll out this autumn, people on modest incomes do not decide to opt-out of the schemes for fear of losing means-tested benefits when they retire.The new flat rate pension, payable to everyone who has made sufficient National Insurance contributions, will be the equivalent of today's current pension credit limit, around £143 at today's rates. The start date will be announced in the forthcoming White Paper. Scottish Widows head of pensions market development, Ian Naismith, thinks the Government will want to move quickly. He said: "It could be implemented in 2016."People who are already receiving a state pension, including an earnings-related element, which exceeds the new flat rate limit, will not have their pensions reduced. Similarly, people who are still working who have built a higher pension will not be penalised. However, they won't be able to accrue any further pension even though they will still be expected to pay the same or higher National Insurance contributions. These people will be losers under the scheme. The Pensions Policy Institute (PPI) calculates about 6.8 million pensioners could stand to benefit from the flat rate pension, while around 5.2 million will be worse off. Niki Cleal, PPI director, explains: "The winners are likely to be women, carers and lower earners, while the losers are likely to be higher earners who would have clocked up higher pensions."Mr Bee believes the Government is doing the right thing. He said: "The basic state pension has been allowed to erode. A flat rate pension of £143 will be much more valuable, especially if it keeps its value through inflation or earnings linking."One of the problems is that people don't appreciate how valuable it is. "To buy an equivalent index-linked annuity would cost around £160,000, which is the average cost of a house."The details of how the pension will be introduced will be set out in the White Paper, and there are likely to be some complex transitional arrangements. It is not clear how self-employed people will be affected. Most people in the pensions industry welcome the change. Stan Russell, a senior pensions manager at the Prudential, said: "It will simplify pensions and remove disincentives for people to save for their retirement. If means-testing is removed, there will be no reason why people on low incomes should not save."Research by the Prudential found one-in-six people retiring this year will be relying on the state pension alone. But Mr Russell pointed out: "The current generation of retirees are the lucky ones. They are more likely to have been members of company pension schemes. As we move through the generations, more people will be relying on the state pension. This is why it is important that auto-enrolment is successful."Whether the flat rate pension will indeed encourage people to save more remains to be seen. Scottish Widows' latest pension report showed UK pension savings hit an all-time low this year, with only 46% of people saving enough for retirement. In Scotland, the proportion is higher than average at 56% but that still leaves nearly half of Scots not saving enough.The main reason people give for not saving is lack of affordability. There is also scepticism about whether pensions are really worthwhile. However, Mr Bee spells out the logic of joining a company scheme under auto-enrolment. He says: "You, the employee, will pay 4% of your salary and your employer and the taxman will pay another 4%. So, say you pay in £50, another £50 will be added. "You will then have a pension pot of £100 and at retirement you can take £25 in tax-free cash, so you are only putting £25 of your own money at risk."

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Government hopes pension change gets people saving

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