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What’s the point of the pension shake-up?

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Profile photo of Ian Robinson Ian Robinson Senior Money Researcher
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Blink and you’ve missed it! The speed of change seems to have sped up, with several far-reaching proposals all coming along together. Pensions are getting the most attention, but is an overhaul really needed?

First the state pension age for women was going up to 65 in 2020, then it was brought forward to 2018. Hard on the heels of this, the age for both men and women is now set to rise to 66 in April 2020. And after that an increase to 68, or even 70, seems imminent.

At least the number of ‘qualifying years’ needed to get a full state pension has fallen, to 30 years old for both men and women. The link to earnings has been restored too, so pensioners shouldn’t ‘fall behind’ as they have done before now.

Changes to the pension system

At the moment, the basic state pension is £97.65, rising to £102.15 in April 2011. If this is your only income, and you have little or no savings, you also qualify for more money in the form of pension credit. This takes the total up to £132.60. The trouble is that this extra income is means-tested and over a million people who are eligible never claim it.

The government is looking at ways of abandoning means testing and moving to a flat-rate pension. This will cut down on bureaucracy and remove a disincentive to saving, but it’s not without its critics.

Some people have gone out of their way to build up extra state pension (through SERPS and S2P) and so would look suspiciously at a system that pays everyone exactly the same. Others have not paid enough national insurance to qualify for a full state pension – how would the new system deal with them?

Merging income tax and national insurance

The Office of Tax Simplification threw another suggestion into the mix this week – to merge income tax and national insurance, so that we just pay one lot of tax on everything we earn.

It sounds great and would mean big savings for employers and government in reduced administration costs. But again, there are potential hitches. Those over 65 don’t currently pay national insurance, so would they be taxed at a lower rate? How about the self-employed or those who don’t work? Will one size fit all?

We’ll keep you up to date with changes as they happen with a special Budget Day Blog, but what do you think of the latest raft of proposals? Will the outcome be worth the upheaval? Are there alternatives that the government has overlooked?

Comments
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richard says:
13 March 2011

As far as I’m concerned – it is a political ploy – It ignores two things –

One – THATCHER removed the link with average earnings (and inflation proof) and for 30 years pensioners on a state pension – that had paid every penny asked of them – have had a annual reduction in the value of their pension . The new increase does NOT return the standard state pension to the actual Level before Thatcher. Means tests should NOT be used to supplement an inadequate pension – The majority of rest of the EU have better pensions

Two – the attack on public service pensions and work conditions – is very misplaced, In fact it is back to the THATCHER Tory oppression. Several professions have been exempted – but several have not such as Teachers and Nurses. If they persist – Teachers and nurses will leave Public Service causing a backlash – with schools and hospitals having to employ agencies to fill the gaps – Just in Thatcher days. Now why aren’t I surprised??

The physical stress of say the police etc is understood by everyone – but the mental stress of Teachers and Nurses is completely ignored – Can you imagine a 65 year old trying to control a class of 16 – 17 year olds who have no interest in studying – have no prospects of jobs – and no power to impose discipline that is obeyed? In many areas even their parents cannot or won’t control them – yet 65 or even 67 years olds will be expected to produce “results”!!!!!! A disaster waiting to happen. The government will blame any shortcomings on the teachers – not the system – Just as Thatcher did in the 80’s and 90’s

The only “good” result – a large number of teachers dying of stress induced diseases – reducing the cost of state pensions.

If you think I’m exaggerating – I know dozens of teachers much younger than 65 who died “on the job” due to stress – and this was in the days when discipline was better applied and with virtually no emphasis on exams – The students also had rich assortment of jobs to apply for and get.

The sooner the Coalition breaks up the better. – Remember the cuts haven’t yet started (except for a tiny rise in VAT)

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Hector Macduff says:
13 March 2011

I suppose we need to wait and see but if existing pensioners are paid at a lower rate there is bound to be trouble. How could it ‘be fair’ to pay a lower rate to someone who has made full rate NICs contributions all their working life (40+ years) but pay the full rate to someone who has made the minimum contribution. A woman who has made full contributions and retires before the change date would be paid less than a man of the same age who qualifies for a pension after the change date. Hardly ‘fairer to women’

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jonas131415 says:
14 March 2011

Many people will spend their retirement in povety. I totally disagree with the decline in final salary pensions. A pension should be reliable and predictable. So many now have schemes where their pension is gambled on the stock market with fund managers and other taking their cut, so they cannot know what they will get on retirement. Let’s not forget what happened to endowments. Lots of half-promises but all too often little left for the invester. Do we believe that these vast pension funds will be left untouched by traders and governments? No chance. Thatcher allowed companies to raid their pension funds when it was believed they had too much money in them.

The state pension link to earnings or inflation should be legally binding, plus an increase each year to restore its value to pre Thatcher levels.

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Fat Sam, Glos says:
15 March 2011

Firstly, I cannot understand why public sector workers are complaining. On the whole, they receive far greater contributions to their pensions from their employers than private sector employees and are more likely to have a final salary pension.

Secondly, the last time I checked, we lived in a democracy. People still have the right to CHOOSE whether they want to be in the police, the army, become a nurse, teacher, etc. No one is forcing them. If you think the pay and conditions are not going to be acceptable than don’t follow that particular career path and aim to do something else.

Finally, what you do in your job is reflected in your SALARY at the time which, because we live in a free-market economy, is largely based on the simple laws of economics. Hence why footballers earn substantial sums and care-workers a lot less even though, arguably, they work just as hard if not harder.

There are far too many work-shy people in this country who want a return to some golden era of fat pensions and low working hours (and perhaps even smoking in the office and a 3-hour lunch break every Friday in between pushing pens). Times change. The world’s changed. Get over it. Move on. If you don’t we’ll become the next third world. And believe me, there are many in the third world who’d put us to shame with their work ethic.

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Jeanette says:
20 April 2011

I was hoping for an early retirement, I worked for 42 years paid full stamp bringing up a child and helped bring up someone else’s child. I worked 2 jobs in the last 11 years of my working life 3 before that and I am living on a very meagre personal pension which I saved for myself. I am almost 58 my husband is 70 and he didn’t retire until he was 67 anyway. Now I find out I have to wait yet another year for my pension not 63 but 64. So what would anyone do but go back to work until I am 64. Now finding work is a joke I have tried now for the last 2 years and finally got a job lasting 1 month only – so ok it will be on my cv. So I have been very frugal and saved the money from selling my house which was too big so I downsized to a caravan. Now I can start another business with my own capital so I have an income until I retire and no doubt put as much away in savings so I do have a personal pension when I finally become of age. However what annoys me is that I have paid all my NI money already, I do not owe the state anything but now I will be giving them the extra which is not going to go on MY pension but someone else’s!!

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