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Reforming State Pensions During the past half century, the UK has developed the best private pensions system in Europe. Unfortunately the state system has failed to keep pace and government is rightly seeking to improve matters so that those without a private pension (personal or employer sponsored) can be better off in retirement. Whether the recent white paper will help is open to severe doubt. 
The main problem is that unless we are very careful, the proposed new National Pension Saving Scheme (NPSS) could inadvertently damage the existing pension provision infrastructure. There are two principal reasons for this. Firstly the proposed structure could encourage employers actually to reduce their commitment to pension provision. Many currently contribute more than the 4% suggested in the white paper and could decide to reduce to this new level by 2012, when the new regime is due to start. The other reason is more tenuous and is based on outcomes in Australia where the overall savings rate (that is the proportion of income saved each month) has fallen ever since the introduction of compulsory pensions. There is no clear cut evidence of ‘cause and effect’, but it is generally believed that people feel their future has been made more secure by the compulsory pension scheme and that they therefore do not need to make any further personal provision. Unfortunately, the benefits may well prove disappointing over the longer term and people find that the lack of personal provision leaves them facing a bleak retirement. Whether the introduction of “soft” compulsion here (the NPSS will have automatic enrolment but allows for an opt-out) will have the same effect is unclear, particularly since savings rates appear to have been falling generally. However, the warning is clear; in Australia, the rate has actually gone into negative, falling below zero, so that households now spend more than they earn. The NPSS is expected to start in 2012 with 3% employee contributions, 4% employer contributions and 1% government top-up on earnings between £5,000 and £33,000 a year. There is currently no indication that there will be the same 25% tax free cash as applies in respect of all non-state pensions, and if this remains the cases, employees will be worse off than currently, should employers switch to the new basis by closing their current voluntary schemes. It is also not clear how monies will be invested and by whom. The government hardly has a good track record for investments – and more importantly, perhaps, administration. 
Other changes to the system are that the link between the basic state pension and earnings, removed in the 1980s will be restored (from 2012, if the then Chancellor thinks it can be afforded) and the retirement age is set to rise from 65 to 66 in 2024, 67 in 2034 and 68 in 2044. So if you are under age 47 now, you are likely to be affected.The Second State Pension (which replaced SERPS) will become flat rated, even though contributions are income related. At the same time, “Contracting out” in order to seek to find a better return from the private pensions sector – something that has been with us since the days of the Graduated pension in 1961 – is also flagged to end for money purchase schemes, from 2012. It will effectively end for final salary schemes from next year, due to the lower level of rebates being introduced. If you require any further information about the services that we provide or would like to review your financial planning position, please contact us |