New Labour, new pensions

SPECIAL REPORT: PENSIONS

It is no secret that the state is finding it increasingly difficult to meet our pension bill. In the past the government has got round this by reducing the value of the pension, but at last it looks as though the real issue of how we can fund decent levels is to be tackled. Labour committed itself to overhauling the pension system and now Frank Field, its pensions guru, has been appointed social security minister with responsibility for pension development. While sketchy on details, Labour's plans are expected to be fleshed out later this year, leading to Green and White Papers next year and the introduction of legislation.

Labour is essentially proposing a three-tier pension system: the first layer is the basic state pension to which everyone will remain entitled; the second will be a top-up; and the third will be voluntary arrangements.

The basic state pension will stay in its current form and will continue to rise in line with inflation. Labour has said it will be "retained as the foundation of pension provision". There are political reasons why Labour wants to keep the basic pension, says Matthew Demwell, for the Association of Consulting Actuaries. He said: "The basic state pension provides a flat amount for all which gives it a certain social acceptability, it also acts as a safety net for the low paid. There is a certain political sensitivity around the state pension so that no party would want to be seen to get rid of it."

Currently, the second tier of pension is the state earnings-related pension scheme (Serps). But this has not worked well. Many people are contracted out of it into private plans and most will not receive the full benefit. Under Labour plans, the type of second-tier scheme and the way contributions are made will depend on individual circumstances. Serps will remain an option for those who wish to stay within the state scheme. Those who contract out will continue to invest their contributions in a private plan. Citizenship pensions, equivalent to Serps, will be introduced for people who have not been earning, such as the unemployed, carers and the disabled and infirm. Contributions will come from the state and so, presumably, will be funded through the tax system. Just how much the extra cost will be and who will pay has not been made clear. "Stakeholder" pensions will also be introduced for employed people who wish to opt out of Serps but want to make extra pension provision.

Both citizenship and stakeholder pensions will be available from pension providers who have been approved by the Government. Labour hopes to encourage all sorts of groups, including small firms in the same area or profession, and trade unions, to club together and set up a pension scheme. Private sector pension companies are also expected to run schemes.

Labour's third tier would consists of company pension schemes and private pension plans. There is speculation that compulsory saving could be introduced. In the past Labour has always said that it will not increase the level of employee compulsory pension contributions. But some believe that with the value of the state and Serps dwindling, where no occupational scheme is provided, Labour may make it compulsory for employees and employers to make contributions into private pension funds. Joanne Hindle, the director of pension development at NatWest Life, believes Labour will have to make additional contributions compulsory if people are to have adequate pensions in the future. Others believe the Government will opt for attractive tax breaks to encourage saving for old age. Ian Overgage, the marketing manager at Flemings, points to Labour's plans to introduce individual savings accounts to encourage long-term saving. The tax breaks on these could be generous for long-term savers and could run alongside pension provision.

If the Government is to maintain the basic state pension and provide a citizenship pension for people not working, where will the revenue come from? There is speculation that it could scrap higher-rate tax relief on pension contributions, though there are disadvantages to this as it could put people off investing in their pension. And while it would be simple to administer with private pensions, it could turn into a nightmare with company schemes.

Start your day with The Independent, sign up for daily news emails
Suggested Topics
Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search
This year's models: buyers have plenty of options as they try to get the money together to drive away from the dealer in a new car

Car finance options: Best way to buy a 65 plate

Sales could find another gear as the '65' registration hits the forecourts next week. Rob Griffin looks at the finance options
In too deep? Travel cover is among the benefits offered by packaged bank accounts

Claims firms blamed as complaints soar over packaged bank accounts

Many customers complained they were switched to the accounts without their knowledge

Finger on the interest rate trigger: the Bank of England

The best deals on personal loans: Peer-to-peer providers are more competitive for smaller sums

Meanwhile, high-street lenders continue to cherry-pick and be more competitive on larger loans

China stock collapse: Five things you need to know about 'Black Monday'

The market plummeted this week, losing all the gains made for the year

Which? warns sports fans about Rugby World Cup ticket scams

GetSporting.com offers deals that may be too good to be true

Could it be the time to focus on Japan? Some believe the country has no choice but to boost consumption and the economy will get back on track

Investors told to travel the world in the search for higher returns

Assets have risen in value across the board and volatility isn't going away. Rob Griffin asks where we should put our cash
As rising house prices push up demand for renting, so tenants are having to dig deeper than ever

Starter home initiative is urgently needed as rents go through the roof

Rents in England and Wales rose by 1.9 per cent in July to an average of £804

Peer-to-peer lending rates put Nisas to shame

The returns from P2P providers look more attractive than ever

Questions of Cash: Log-in problems turned eDreams booking into one-way ticket to nowhere

The company failed to provide our reader's flight ticket - or a refund

Hot property: business has been booming in estate agents this month, even though it’s the height of the summer holiday season

Heat rises for mortgage deals as UK homeowners sense a rate hike coming

The housing market should go quiet in August but instead people have been acting like cheap loans won't last. Do we really have to rush, asks Simon Read
Phones have now overtaken personal computers as the most used way of accessing the internet

Who you gonna call? The Complaints Busters

Unhappy customers have been given their own Ombudsman to help fight for them.

Undergraduates are being tempted with freebies by banks

Students should give freebies a wide berth and focus instead on cheap borrowing

An interest-free loan far outweighs the value of any of the bank's incentives

The Spanish carrier changed a reader's flight from Madrid – to a time before she was due to land

Questions of Cash: 'A connecting Vueling flight was cancelled and all my travel costs were left hanging in the air'

Our reader encountered problems when flying from London to Ibiza in May to take part in a charity ride

Complacency about rising rates could prove to be costly

Interest rates stay at 0.5% for now - but don't wait to get a better deal on your savings and mortgage

The years of ultra-low rates are coming to an end

The elderly are being targeted by fraudsters with postal scams such as fake prize draws

Fraudsters are bombarding older people with dangerous pension scams: here we reveal the warning signs

Many people are being repeatedly targeted by crooked schemes

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    SThree: Experienced Recruitment Consultant

    £20000 - £40000 per annum + OTE + Incentives + Benefits: SThree: Established f...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE 40/45k + INCENTIVES + BENEFITS: SThree: The su...

    Recruitment Genius: Collections Agent

    £14000 - £16000 per annum: Recruitment Genius: This company was established in...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE 40k: SThree: SThree are a global FTSE 250 busi...

    Day In a Page

    Refugee crisis: David Cameron lowered the flag for the dead king of Saudi Arabia - will he do the same honour for little Aylan Kurdi?

    Cameron lowered the flag for the dead king of Saudi Arabia...

    But will he do the same honour for little Aylan Kurdi, asks Robert Fisk
    Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

    Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

    Humanity must be at the heart of politics, says Jeremy Corbyn
    Joe Biden's 'tease tour': Could the US Vice-President be testing the water for a presidential run?

    Joe Biden's 'tease tour'

    Could the US Vice-President be testing the water for a presidential run?
    Britain's 24-hour culture: With the 'leisured society' a distant dream we're working longer and less regular hours than ever

    Britain's 24-hour culture

    With the 'leisured society' a distant dream we're working longer and less regular hours than ever
    Diplomacy board game: Treachery is the way to win - which makes it just like the real thing

    The addictive nature of Diplomacy

    Bullying, betrayal, aggression – it may be just a board game, but the family that plays Diplomacy may never look at each other in the same way again
    Lady Chatterley's Lover: Racy underwear for fans of DH Lawrence's equally racy tome

    Fashion: Ooh, Lady Chatterley!

    Take inspiration from DH Lawrence's racy tome with equally racy underwear
    8 best children's clocks

    Tick-tock: 8 best children's clocks

    Whether you’re teaching them to tell the time or putting the finishing touches to a nursery, there’s a ticker for that
    Charlie Austin: Queens Park Rangers striker says ‘If the move is not right, I’m not going’

    Charlie Austin: ‘If the move is not right, I’m not going’

    After hitting 18 goals in the Premier League last season, the QPR striker was the great non-deal of transfer deadline day. But he says he'd preferred another shot at promotion
    Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

    How Isis profits from destruction of antiquities

    Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
    Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

    'If we lose touch we’ll end up with two decades of the Tories'

    In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
    Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

    The Arab Spring reversed

    Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
    King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

    Academic claims King Arthur was real - and reveals where he lived

    Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
    Who is Oliver Bonas and how has he captured middle-class hearts?

    Who is Oliver Bonas?

    It's the first high-street store to pay its staff the living wage, and it saw out the recession in style
    Earth has 'lost more than half its trees' since humans first started cutting them down

    Axe-wielding Man fells half the world’s trees – leaving us just 422 each

    However, the number of trees may be eight times higher than previously thought
    60 years of Scalextric: Model cars are now stuffed with as much tech as real ones

    60 years of Scalextric

    Model cars are now stuffed with as much tech as real ones