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Lorna Bourke: what next for pensions?

Now that Osborne has launched his covert raid on pensioners, what else might he have up his sleeve?

 
Lorna Bourke: what next for pensions?

Lorna Bourke answers a reader's pension question, and makes some predictions on the new 'single tier' pension.

Tax grab on pensioners

The Budget tax grab on pensioners, dubbed the ‘Granny Tax’ has made us all wonder: what next for pensions? If Osborne is prepared to impose a £3.3 billion tax penalty on over-65s, dressing it up as tax ‘simplification’, what else might he do? 

£3.3 billion is the saving to the exchequer over the next four years of freezing age allowance until it comes into line with the standard personal tax allowance.

As reader Neil Devine puts it: ‘I'm not a pensioner yet, but I will become one (God permitting) by mid 2013. I’m unsure when the flat-rate pension of £140 per week will be introduced, but my pension forecast already shows my pension will be £140 per week based on the superannuation contributions I made throughout my working life. Whilst not begrudging anyone receiving the new flat-rate pension when it is introduced, it does pi55 me off that I've earned that sum while it is just being handed to others. I don't suppose my pension will be increased because of the contributions I made – does anyone know?'

Nothing is likely to happen before you reach retirement age next year, so you should retire with whatever state pension you have earned through your national insurance contributions, including contributions to earnings-related top-up pensions such as the current S2P, its predecessor Serps and earlier graduated contributions – even if by then your pension exceeds £140 a week.

'Single tier' pension

In his Budget speech the chancellor said that he would publish a paper ‘in the spring’ on the new ‘single tier’ pension, which would provide people with a basic state pension above the level of means testing. This would be achieved by combining the second tier pension with the basic state pension. 

He also confirmed that at today’s prices it was likely to be around £140 a week. Crucially, he made no mention of what will happen to state earnings-related pensions already in payment and those earned and paid for but not yet in payment. 

Until that paper is published, we have no information of when the new single-tier pension will be introduced, although it is likely to be towards the end of this parliament in 2015 when the reform of means-tested benefits, limiting them to a maximum of £26,000 a year, becomes effective. 

This will also coincide with the introduction of auto-enrolment into company pension schemes. The chancellor confirmed that the new flat rate pension will be ‘contribution based’.

Uncertainty on top-ups

Neither do we have any details of what will happen to earnings-related top-up pensions, which have been earned but are not yet in payment. The most likely outcome is that contributions and accruals of the second tier pension will be frozen and the new flat rate pension of £140 a week paid to new pension claimants as they reach retirement. 

We don’t know whether Osborne will honour the top-up pension benefits earned in excess of £140 a week – although there will be a huge public outcry if he seeks to grab this excess, given that millions of people have taken this higher pension into account when saving for retirement. 

It is inconceivable that he would retrospectively take back earnings related pensions already in payment, although he might freeze any future inflation linked increases as he has done with age allowance. This will gradually reduce the real value of these top-up pensions as their spending power is eroded by inflation.

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34 comments so far. Why not have your say?

Mike Greenland

Mar 24, 2012 at 08:42

I am a pensioner and I can't get too excited about the changes. We get a lot of benefits, bus pass, fuel allowance and so on. What makes me so angry is the pathetic changes to child benefit. No, I don't have any children. It is outrageous that still two people can earn up to £100,000 and keep the benefit yet one person earns over £50,000 and it goes. This is just not FAIR treatment and encourages lying and "I'm not cohabiting claims"

Get your brains in gear politicians and journalists stop whinging about pensioners and start thinking about families.

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Dennis .

Mar 24, 2012 at 08:54

Or to paraphrase Laura's article.

"We don't know what's going to happen"

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jeremy moore

Mar 24, 2012 at 09:16

look, it doesn't matter who is in power, the most vulnerable and those who cannot afford high flying accountants will be robbed blind, and as mike as allured to being economical with the truth may be our only option, tradesmen doing jobs for cash in hand, yeh ? we've all experienced it, well get used to it, it'll become common place.

jerry

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Delshan

Mar 24, 2012 at 09:20

'All of these measures will place a greater responsibility on individuals to save for retirement – either through personal pension schemes, their occupational pensions, or general savings through, for example, ISAs.'

How can one possibly save for retirement in an ISA when interest rates are 0.5% and inflation is 5%+?

What is going to happen to pension credits when the fixed rate is introduced, will this effect current pensioners?

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Rob Walker

Mar 24, 2012 at 09:36

Despite the significant tax relief pension contributions enjoy, there is overall a lamentable lack of interest in the UK to providing for one's old age. If we accept that as reality, and nothing much will change, then it's better to bring all pensioners up to subsistence level (after all, those who fall short will get it in other state benefits) than to implore everyone to dig a bit deeper and make their own arrangements - that's just not going to happen. If the cost of that realistic pension rate (ie the £140 referred to) comes out of less-generous pension allowances and subsidies then, for the country as a whole, that's not necessarily a bad thing so long as the individual is not denied benefits they have earned (eg. earnings-related supplements).

This view will probably not go down well with the likes of us, with an interest in investment and money matters, but I think an ageing population that can be respectfully catered for by the state, regardless of their prudence during working life, is ultimately for the common good.

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Pat

Mar 24, 2012 at 10:05

Pension (money) alone is not going to solve the problems of old age.

Should the government be thinking of the requirement of an aging society, e.g initiating old age villages sold at low profit margin where the old folks can enjoy the companies of their own age and share the ease of amenities and geriatric medicines as dictated by gradual physical and mental decline.

It may possibly bring other benefits to the society .eg. releasing housing stock to the young. And, the young would be able to concentrate on their own wealth creation while the burden of their week days' worries of aged relatives were out of the way.

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Roger Bacon

Mar 24, 2012 at 10:10

Those contracted out , and youngish, have probably made the right decision then (?). Had they stayed contracted in they would receive the higher single tier (only) on retirement but not received the benefits from their refunds going into their own fund. What a mess successive govs have made of pensions ... without exception... and its all about a pathetic (average) of 20% of average earnings. The rest of europe are ahead of us by miles with an average of 50% !. .... and we had a labour government for 13 years ! I wonder what polling booths are for sometimes .. certainly not to achieve a fairness. You've got to hand it to the liberals ... they have stuck to their guns on getting the personal allowance up to 10,000 and I bet the reasonable increase in basic state pension is their doing. I think they should be given more credit for achieving things in an incredibly difficult environment . I'm swinging towards them not away . (And they sound adult on Europe and not just pandering to those who cant see that we would be totally isolated and weak on our own out of Europe). Too much detail I know but I wish there would be proper debate on these things.

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Harmoney100

Mar 24, 2012 at 10:48

I'm in a similar situation to Neil as far as retirement date but will receive only the full basic pension. There are quite attractive terms to defer taking this but it is very unclear what the implications of doing this will be in view of the proposed changes. Any thoughts?

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Philip Swift

Mar 24, 2012 at 11:12

Its all quite laughable how politicians talk about the need to save for retirement. People should be responsible blah, blah, blah. At every opoortunity over the past 20 years successive governments have raided pensions and saving to pay for the work shy and imigration. The 'pensions industry' have reduced annuities dramatically over the past 20 years yet we are still being told we are encouraged to save for a pension.

All I ask is 'where is the encouragement, really?'

I agree we should be responsible, we should plan and save but please, cut the nonsense, be honest and lets see some tangible support.

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jeremy moore

Mar 24, 2012 at 11:32

harmony100

i retire next year in november, now i suppose i am fortunate, i have in the past had a good job working abroad and paid into 3 private pensions and also take two company pensions, they add up to giving me a reasonable standard, by no means well off but i am now on my own and live within my means, i was wondering if i left my state pension until the new £140 a week comes into force, would i then be eligible for that, i opted out of serps and that element is being paid to me under a private scheme.

any thoughts appreciated.

jerry

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nickle

Mar 24, 2012 at 16:35

We don't know what's going to happen

==========

Yes we do. We're going to be shafted to pay for the 7,000 bn of government debt, pensions included as well as other scams such as PFI

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Brian Stafford Garthwaite

Mar 25, 2012 at 10:29

We are told we must save for our retirement - though how people on little more than the minimum hourly rate can do this is not explained. What about our M.P.'s setting example, scrap their own generous pension scheme and start SAVING. Don't hold your breath!

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nickle

Mar 25, 2012 at 10:47

Well, I did the calculations as to what would have happened if people had invested their NI in the FTSE, and then bought an annuity.

For a median worker on 26K, they would have ended up with a pension of 19K a year, joint life, linked to RPI. Compared to the 5K, linked to CPI (worse) and not fully joint life (payouts are reduced on the first death) of the state pension.

That's a huge difference.

However, the government debts are so large, that they won't do it. They need all the cash they can get, and even that isn't enough.

Conclusion - avoid the state as much as possible. Save as much as possible in a way that is difficult for the government to get its hands on. Pensions and property being the big examples.

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James B. Johnson

Mar 25, 2012 at 14:26

Don't worry.

In 2015 it will be BYE BYE to Osborne and all the Tory twirps.

Don't believe the propaganda that all politicians are the same. THEY ARE NOT.

GET OUT AND VOTE LABOUR.

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nickle

Mar 25, 2012 at 15:14

Yeah Ha!!

Lets load up on debt and really screw people.

There is no money. Labour saw to that.

7,000 bn of debt excluding bailing out the feckless.

Bank bailout, to put it in context, is 1% of that figure.

If you think that the banks have screwed up, governments in the UK have run up 100 times as much of a problem.

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Dennis .

Mar 25, 2012 at 23:33

James B Johnson

I am not aligned to any particular party but after what Gordon Brown did to this country can you be serious about voting labour?

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Bill lawson

Mar 26, 2012 at 10:46

I am retired , looking back to the60s as a single person a very large amount of my earnings was taken by income tax and national health payments, when company pensions arrived contracting out was a big mistake, due to my profession changing employers was frequent this made my company pensions almost useless luckily I took out a private self employ pension which was reasonable until restriction on drawdown was imposed, am now finding difficulty to meet commitments fuel cost are my biggest problem which is causing food price rises and massive inflation. My attempt to shorten my misery with drink is also causing grief due to government policy . where did I go wrong ?

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Dennis .

Mar 26, 2012 at 11:13

I guess that one of the issues is that people who make policy decisions are part of the civil service pension scheme and don't experience the problems of changing employer etc.

I came across a similar issue with company cars which are heavily taxed even for essential users like salespeople but civil servants don't get them so it's not a problem for them, however look at how people in the armed forces who get substantial private school fees paid tax free. Similarly most civil servants don't spend hours on the roads (like reps and lorry drivers) so don't experience first hand the effects of their policies.

Politicians and the law makers are outside the "real world" of self employed and low earnings and don't realise (or care for) the impact of their actions.

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Peter Daynes

Mar 26, 2012 at 19:31

£140 pension is the biggest con going, it is basically just a cover for scrapping serps and its replacement the ssp Most people who have worked most of their life are entitled to this or more, And those that haven't are most likely to be on benefits so nobody will actually get an increase, I suspect those that were going to receive more from serps or their contracted out company pension. will lose and this will be given to those that hadn't accrued £140 but they will then lose their benefits. £7000 a year is great only £1300 council tax to find.

Instead of printing money and giving it to the banks which means they don't have to pay a proper rate on annuities to private pensioners ( another con )

Print it, but ring fence the investment returns from it to pay divided to over 65's

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nickle

Mar 26, 2012 at 19:48

Agreed Peter. They are going to steal from a lot of people.

So what could you have had.

Median wage earner, on 26K. If they had put their NI into the FTSE over the last 40 years, they would have had 19K a year, linked to inflation, retire at 65, joint life.

http://www.lordsoftheblag.net/2012/01/state-pension-rip-off.html

and

https://docs.google.com/spreadsheet/pub?hl=en_GB&hl=en_GB&key=0AvnR4AGFSHkocEh3N2FreUtzUnpJbkUtXzdNNDktRlE&output=html

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Dennis .

Mar 26, 2012 at 20:10

Cutting through the emotion here it's worth remembering that when we paid our NI contributions (into an unfunded pension scheme) we were effectively making promises for the next generation to pay for our pensions in the hope that they will be able to pay us. The next generation will be the first who are worse off than their parents so we had better hope that they don't rebel!

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Bill lawson

Mar 27, 2012 at 09:35

Average earnings went from £1000 to £25,000 per year in about 40 years, assuming this will continue like this god help the next generation ,especially if property prices fall, a lot of effort is going into providing new houses , what if mass migration took place , would this be a blessing or a curse?

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Graham Barlow

Mar 27, 2012 at 12:26

The whole financial mess is beginning to get the whiff of desperation about it. The truth is due to the massive fall in Corporation Tax there is nothing left to replace it. The bulk of the damage done to the UK economy can, with analysis be laid at the door of profligate ,interfearing Politicians. They still have the temerity to lecture and hector us about paying Tax and talk about morality. Osborne wants to get one thing straight Tax Avoidance is Legal and not immoral, Hypocracy, on the other hand is cynical and as transparent as a plate glass window, and his Budget speech was an arch example. It will not be long before they ,the Politicians, will be resorting to confiscation of savings. You will see every savings account in Britain have 5% or 10% deducted straight out of the Banks ,to meet the deficit. You will be issued with a Post crisis credit which will never be redeemed, like Post War Credits. Welcome to the UK all you immigrants, they will get the money to keep you from somewhere.

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nickle

Mar 27, 2012 at 18:12

I've no doubt that is in the plan. Even that isn't going to cut it.

However, I suspect that it won't be Osbourne. If Labour get back in when the shit really hits the fan, then its odds on.

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nickle

Mar 27, 2012 at 18:19

Bill.

Mass migration doesn't work. Targeted migration helps.

The government spends 11K per person per year. You need to be on over 40K to be of financial help to the UK government.

So as long as the migrant (dependents included) earns 40K plus per migrant, (120K for a family of 3, with one working), then the UK breaks even. More and we are better off.

That's not the current case with migration. In spite of many migrants being very hard working and motivated, far more so than lots of Brits sitting on their arses, they still do not improve the UK government's finances.

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Dennis .

Mar 27, 2012 at 18:26

I think that this thread has now hit Daily Mail levels of discussion.

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nickle

Mar 27, 2012 at 18:33

Has it? I don't see any racism which is typical for the DM.

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Bill lawson

Mar 27, 2012 at 21:19

I did not mean migration of just immigrants, Dennis .

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nickle

Mar 27, 2012 at 22:26

So which bit is DM? I can only see one that might be considered DM.

The rest has been detailed discussions about how on earth the government (and that means future taxpayers), can pay for the pension contracts/promises made, when the government has no realised assets.

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Dennis .

Mar 28, 2012 at 17:18

I was referring to the DM level economic discussions that go on here, a bit like the fact that 93% of all statistics are made up on the spur of the moment. House price increases are a good thing (why?). Everything will be OK if we change the government (again). Tax the bankers (how many times?) etc.

The basic problem with government pension schemes is that unless you say we will start a pension system in say 30 years (a bit like a private one) and put all the NI aside then you have no option but to pay out of current taxation and commit future generations to look after you. We are therefore all at the mercy of our children and politicians yet unborn (scary thought?

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nickle

Mar 28, 2012 at 20:32

I disagree. I've posted what you would have got, if your NI had gone into the FTSE. A fund of 550,000 or an income of 19K a year, RPI, joint life.

https://docs.google.com/spreadsheet/ccc?key=0AvnR4AGFSHkocEh3N2FreUtzUnpJbkUtXzdNNDktRlE#gid=0

This is far in excess of the 5K offered by the state for the same money

This is after a period where the FTSE hasn't performed, and since for a fund, the real money comes at the end, it would have been a lot bigger if it had.

So what conclusions can you draw from this (evidence based, post your numbers if you think mine are wrong).

1. The state offers awful value for money

2. Stopping future accruals for the state pension now, and forcing people / diverting NI into a fund will make people richer in retirement.

What the state needs to offer is a just in time bailout. If, and only if, your fund plus remainder state pension isn't more than 5K, do you get a bailout.

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Anonymous 1 needed this 'off the record'

Mar 29, 2012 at 05:20

nickle there is nothing wrong with your numbers, Dennis's point is that the current system was started 100 years ago and cannot be stopped for 30+ years to allow funds to accumulate for. Someone has to pay current pensioners now so your NI funds are not available to invest in the way you envisage so that the comparison is erroneous. As he says it's DM economics.

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nickle

Mar 29, 2012 at 18:05

Well, its not quite.

The critical part is the difference between the two. 19K versus 5K, and that is down to compound interest.

So if the government offers the guarantee that accrued state pension rights, plus the income from the fund in draw down drops below 5K, then people aren't worse off. They are in fact better off, because they get the compound growth.

So initially, there would be a cost. However, over time that payouts under the guarantee will fall. After all, if a median worker, 26K a year will be 12K better off, the guarantee is effectively worthless.

Now, let me put the flip side to your argument. You're saying that its OK to take 12K a year off the pension of someone earning 26K a year, to pay other people?

Don't you think the 26K a year worker should be told, and shouldn't they have a say in it?

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Graham Barlow

Apr 03, 2012 at 09:13

People of my age are a living example of how the Government Actuaries got it so wrong over the SERPS Pension in the 1970;s. I qualified for 25% of my average highest earnings over the highest 20 years, index linked. I hate to think what this contract is costing the British Tax Payer, as my Pension is on the way to doubling. It has taken me into the 40% Tax Band so they are now clawing back half of it with the loss of the age allowance. You can see where Osborne and Co are coming from, they think the Pensioners are a lucrative un tapped seam of income to be mined, and this will continue in the absence of Corporate Tax and the decreasing returns on Fuel Duty with the drop in consumption.. Cuts in Government expenditure is the only way out, as the alternative is the confiscation of the People's savavings and capital. The Inland Revenue are now taxing the old age Pension at the source of any private Pension you may recieve rather than paying on a paper Tax return. They are after our money alright in no uncertain terms.

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