How good is the state pension?

With the state pension paying just 17% of average lifetime earnings, the UK desperately needs a change.

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by Oliver Marsland on Jun 25, 2008 at 00:01

The one sentence version: With the state pension paying just 17% of average lifetime earnings, the UK desperately needs a change.

The longer version: A recent review by Aon Consulting indicated that the UK has the worst state pension provision among 25 European countries, with British pensioners on average being paid just 17% of their average earnings as pension, compared to the European average of 57%.

Following the Turner Report in 2005 the government has implemented plans to increase state pension age for both men and women, as far as 68 by 2046.

Lord Turner’s Pension Commission also developed the idea of Personal Accounts with automatic enrolment and compulsory contributions from both employers and employees, although employees will be able to opt out altogether if they wish. The government has now committed to introducing these Personal Accounts.

The state pension has existed for 80 years this month, but as former Work and Pensions Secretary Peter Hain said recently, ‘100 years ago few people lived long enough to collect a state pension. Today one in four babies is expected to live to 100.’

With an impending pensions shortfall of crisis levels, the government is determined to encourage people to save for retirement. Personal Accounts should mean that for those people who take no action, automatic enrolment and compulsory contributions will increase the pensions pot by default.

On its own then it appears that the state pension is very basic indeed. However, a variety of means-tested benefits are available to those on low incomes, including Pensions Credit, Housing Benefit and Council Tax Benefit, as well as Winter Fuel Payments. Taking these into account, our overall state support for pensioners is far more in line with other European nations.

Unfortunately, probably due to the complexity of the system and the lack of awareness of what is available, a sizeable percentage of pensioners who are eligible for one or more of these benefits fail to claim them.

Despite these benefits, for the majority of people it will still be critical to make additional provision for retirement, either through an employer’s scheme or a private pension, in order to maintain anything like the lifestyle which they expect.

Tax relief on contributions and virtually tax free growth on the investments make this a particularly effective way to save for retirement and the pensions simplification rules introduced in April 2006 aim to make the technical landscape more accessible to the layman.

The inevitable increase in the number of pensioners in Britain over the next few decades means that the state will either have to raise taxes substantially to support greatly expanding pension payouts, or place some further restrictions on eligibility while limiting increases.

This could see retirement ages of 70 in due course, or perhaps an upper wealth threshold of eligibility. Even with the advent of Personal Accounts and other government initiatives, the demographic of the nation is such that saving for one’s own retirement is a necessity for most rather than a luxury.

Oliver Marsland of Cathedral Financial Management Ltd can be reached at olivermarsland@cfmltd.co.uk or 01392 211800

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7 comments so far. Why not have your say?

Some good points here, Oliver. There is no doubt whatsoever that pension provision in the UK must change and I'd agree with your last statement, assuming that those who are excluded by your 'most' are the super-rich who simply don't need to save for retirement and the super-poor who just can't afford it. For the latter, it's hard times all the way.

For the majority that fall into that middle ground, the message is clear - any failure to save a meaningful proportion of your income for a meaningful length of time will compromise your quality of life in your later years.

The real problem remains, however, that the pension saving environment in the UK remains a murky world of mistrust, confusion and blatant exploitation. Until someone introduces a better way, people will find it difficult to properly prepare for retirement.

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The people of this country do not save for their pension because they are penalised and humiliated by the government's means tested benefits and because they mistrust the financial industry with its deceitful ways, opague and exorbitant charges, and grossly overpaid staff, obcenely celebrating

their telephone number bonuses in broad daylight, every year.

And with all that, we have a so called Labour government which spent the last 12 years transferring wealth from the poorest 20% of its citizens to the richest 20%, expects its old age pensioners to go cup inhand and claim state benefits from young immigrants and saw fit to abolish the lowest income tax band as well, as a final act of cruelty.

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The biggest issue facing pensions provision in UK is the fact that legislators have secured for themselves and the public sector grossly expensive final salary benefits which the private sector can no longer afford . They are therefore unlikely to face up to the problems of cost , investment risk , and equity which have devastated private sector provision. Gordon Brown took cold feet early in New Labour's reign -he robbed the private schemes and skewed the playing field in favour of the taxpayer supported public sector .The amount of subsidy which the taxpayer must provide to meet the guarantees inherent in public sector pensions is hidden from public view but constitutes a long term financial and social timebomb.

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RISE PENSIONS

FOR EVERY PENSIONER IN THE NATION

you know goverment it makes sence to £500-00 weekly

£500-00 each pensioner payment.

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!998 - council tax 24% of my DSS Pension

2008 - council tax 34% of my DSS pension

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I considered I was saving a very meaningful proportion of my wages ,unfortunately it was with Equitable Life. It is about time this debacle was put right by the government ,who are only too ready to use my taxes to bail out Northern Rock.

But I must say I am not holding my breath for a solution.

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Bob Travels

Dec 03, 2008 at 14:42

Savers are not welcome in the UK.

The Labour government never has and never will provide more than lip-service to people trying to save money for their old age.

Labour want you to become indebted forever, forcing you to work until you die. Tax and Spend is the policy.

The sums are very simple. You have 45 odd years to save for your retirement. If you then live for another 25 years you need to save around 50% of your salary every year. Stock market? Property market? Do you really think that they will give you a GUARANTEED RETURN? More like a guaranteed loss.

Face the facts, all the pension schemes are deep in trouble. Shares are down, interest rates are down, property is down on an unprecedented scale. New rules will now prevail and it will take DECADES to recover from this mess.

And don't forget to vote Labour again, you get what you want....

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