'Drowning in changes': Blair launches another pensions lifeboat
Sunday 28 May 2006
At the heart of the Government's White Paper on pensions, unveiled on Thursday, was simplicity.
"Our reforms to state and private pensions will... dramatically simplify the system, and make the decision to save a very straightforward one," it was claimed. Yet within hours, industry specialists were scratching their heads over proposals for the state second pension (S2P) and wondering if a new national private pension savings scheme would generate enough money for Britons' retirements.
Cross-party unity is essential to ensure that these reforms pass into law, yet this also looked shaky. The Liberal Democrats branded them a "half-solution", while the Conservatives warned that not enough was being done for women.
"Over the years, people have been drowning in changes to pensions - there's a credibility issue with governments," says Ken Murphy of the independent financial adviser (IFA) Bestinvest. "What we really want is joint-party consensus."
The proposals (also discussed on page 20) were based largely on recommendations by Lord Turner's Pensions Commission. Most had already been leaked but there were still some welcome surprises.
Help will be offered to 30,000 more individuals than the current 85,000 who qualify under the Financial Assistance Scheme. (This government fund was set up to compensate workers who lost their pensions when their companies went bust.)
Set against this, however, were fears that the entitlement of middle- and high-income earners to S2P could be curbed. One of the least understood parts of current pensions legislation, S2P is a top-up to the basic state pension, calculated on your lifetime's earnings. By 2030 the Government wants it to become a simple, flat-rate payment instead of one that varies as income rises.
Concerns have been raised because workers will no longer be able to "contract out" of S2P, as many people in "defined contribution" company schemes and with personal pensions have done in the past. Although the White Paper calculates that "people should generally be no better or worse off in retirement" as a result, it is feared that higher earners could end up paying a higher rate of national insurance contributions (NICs) while getting no additional S2P in return.
Separately, the White Paper also suggested that only a third of pensioners would qualify for pension credit by 2050, instead of the 70 per cent cited by the Turner Commission.
Key proposals include:
* Age of eligibility for the state pension to rise to 66 for both men and women over a two-year period from 2024; to 67 over two years from 2034; and to 68 in the two years from 2044.
* From 2012, rises in the state pension and the "guarantee" element of pensions credit to be linked to rises in average earnings.
* From 2012, workers not in a company scheme to be automatically enrolled in a new national pension savings scheme. You contribute 4 per cent; the employer and taxman match it.
* NICs needed to get a full basic state pension to be cut to 30 years (from 39), so helping women and other carers.
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