Monday, January 14, 2013

another busy day for pensions...but is it a good day for future pensioners?

The government today published its white paper on a new "flat rate" state pension for 2017 currently valued at £144 per week. While this is an improvement on the current £107 per week it is expected that in the long term (2060) most pensioners will lose out.

UNISON reminds everyone that £144 is still below the poverty line and Labour Shadow Pension Minister, Gregg McClymont, points out that there will 16 million pensioners in 2017 who will not benefit from the changes and many "Strivers" will be paying extra in National Insurance Contributions.

What has struck me the most about this proposal is the claims that this increase in basic pension will take many people out of means tested benefits so that they will have the incentive to save for their futures under the new pension auto enrolment regulations.

I'm not too sure. Firstly, many low paid are being excluded from auto enrolment. You will have to earn more than £8,105 per year.

Also contributions from employees (3%) and employers (4%) are also just far too low to build up a decent pension and keep the low paid out of dependency upon means tested benefits. In high rent areas if you retire then you are still likely to be on housing benefit and the disincentive to save continues.

But the biggest issue I think is that defined contribution schemes are just plain inadequate. Even relatively good and inexpensive ones like NEST.

Now maths is not my strongest point and this is very much a back of a fag packet calculation. But I have used the NEST pension calculation website to estimate what a male 22 year old on National Minimum Wage (£6.19 per hour 40 hours a week, £12,875 per year) would get if he retired aged 68 after 46 years of defined contribution contributions.

He would receive a pension worth only £1,990 per year (£38 per week) and a lump sum of £22,600. (This is for a pension guaranteed for 10 years after retirement, with spouse pension and pension rises in line with inflation). These figures are subject to stock market performance, annuity rates and not guaranteed.

If he was in a traditional defined benefit 1/80th scheme he would get at least £6,437 per year (£123 per week) and a lump sum of £38,625. He would also get life insurance and ill-health cover. He and his employer would of course have to pay more but the pension would be guaranteed.

Question: So how will you attract the low paid to save for 46 years when they can only expect (fingers crossed) to get a pension worth £38 per week?
Answer: You can't. They are not stupid, they won't do it. Get rid of low pay. Turn a minimum wage into a living wage and auto enrol all workers into a decent defined benefit scheme. Job done. 
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