Defusing the bomb
At first sight, demographic predictions are alarming: there will soon be more old people than earners and taxpayers to support them. John Hancock looks at ways round the problem
Wednesday 05 March 1997
As their numbers increase, pensioners will place a growing burden on the tax-paying - and shrinking - working population. The proportion of people in work is set to fall dramatically relative to the number of people in retirement, from 2.2 contributors per pensioner today, to 1.8 in 30 years' time. This is known as the dependency ratio. In effect, the argument runs, we will not be able to afford even the limited state pension now on offer to our elderly citizens.
It sounds horrific. However, as Corporal Jones was wont to say, don't panic. The UK population may be ageing but it is a slow process, so there will be time to defuse this time bomb.
Professor David Simpson, economic adviser to Standard Life, offers a less than apocalyptic view when he says that: "The dependency ratio is not going to detonate suddenly in the UK; it will decline at a slow and manageable rate until 2030, after which it will either level off or start to improve."
That said, the trend cannot be ignored. Concern focuses on that half of the 27.5 million working population who are not in occupational or other funded pension schemes. As things stand, their well-being in retirement will be the government's (read taxpayers') responsibility through the unfunded state benefits system, including Serps. And that will be the worry for any government - that the cost of paying pensions to an increasing third-age population may be an unacceptable burden for working tax payers and National Insurance contributors. Many future third-agers might be prepared to save into a funded pension scheme if:
l they could afford it;
l the scheme would be appropriate to their needs;
l administration costs would not eat up a large proportion of their savings.
It is partly the absence of these factors that dissuades many modest earners from saving for their retirement.
The first point might be covered by developing a second-tier pension scheme similar to the industry-wide schemes available in Australia. These schemes, essentially occupational schemes with wide access, offer to all Australians a funded (paid for by the beneficiaries, not the current working population) second-tier pension facility. The size of the scheme keeps costs down.
Affordability also has to take into account access to funds which, with pension funds, is difficult, in exchange for favourable tax treatment for contributions and investments; the saver forgoes access to the fund before retirement. This is believed to deter many modest earners who, even if they could afford savings, would be loth to invest in a fund which would effectively be closed until retirement.
While access to pension funds may not be ideal, if it encourages more people to save into funded schemes, it will help reduce the burden for future taxpayers. Also, the Labour Party is studying funded second-tier provision options industry wide - in Labour parlance of the day, this means stakeholder pensions. These should reduce costs.
For some, modest means are not the issue. There is no doubt that some comparatively affluent groups have the resources of fund pension provisions the equal of any working income. For instance, the post-war home ownership boom has left many people as beneficiaries of substantial capital legacies which could largely fund their retired life.
It is estimated that the current value of UK domestic residential property is pounds 1.2 thousand billion, while the total mortgage book for all lenders stands at about pounds 400bn. On the basis of those figures, there is some pounds 800bn of free equity currently available in the UK domestic property market.
Many will remember with concern the home equity plans of the late Eighties which saw some unfortunate pensioners risk losing their homes. However, lenders are back with new ideas, some of which should certainly permit the use of free equity without the twin concerns that the home-owner might be made homeless, or that their family would be denied any value on their death.
One such scheme has recently been launched by the Bank of Scotland. The Shared Appreciation Mortgage allows those in or near to retirement to utilise some of the equity in their homes to fund pension or long-term care arrangements.
The scheme offers a choice of two interest rates. With the first, borrowers pay a long-term fixed interest rate of 5.75 per cent (at time of writing). Borrowers on the second scheme pay 0 per cent interest. At death or surrender, the bank will receive the original amount lent plus a percentage of any capital appreciation since inception.
Where the 5.75 per cent rate is chosen, equity appreciation will be shared according to the original loan to value (LTV): 65 per cent LTV means that the bank will take just 65 per cent of any appreciation between inception and surrender. For borrowers selecting nil per cent interest, the bank's share of any appreciation will be three times LTV, so that 20 per cent LTV will mean the lender taking 60 per cent of any appreciation.
The government could also assist in the task of time bomb disposal. According to the National Association of Pension Funds: "The vast array of complex Inland Revenue regulations is totally unnecessary as only 1 per cent of individuals make full use of the tax system to benefit from a full pension."
NAPF also calls for an increase in personal contribution limits to occupational schemes, so that members (especially older ones, who have the resources and whose need is most imminent) have the same opportunities to invest in pension provision as do holders of personal pension schemes.
None of this means that the demographic time bomb does not exist. But it does mean that through greater legislative flexibility, administrative efficiency, innovative scheme design and releasing some of the large amount of free equity locked up in housing stock, it should be possible to defuse the bomb and ensure that we get past the peak of the problem in 2030 without mishapn
Will your credit card rewards be scrapped following new EU rules on charges?
Crowd-to-let: How crowdfunding sites can give investors a slice of the property market for £500
Q&A: What’s the best way to invest for our baby?
Simon Read: 'Seven Families campaign offers an escape from financial and emotional distress'
After the election: What will Britain's financial future look like on 8 May?
- 1 Which country would be hardest to invade?
- 2 The man who filmed the Freddie Gray video has been arrested at gunpoint
- 4 How the language you speak changes your view of the world
- 5 Royal baby girl born: Duchess of Cambridge's second child will be a princess thanks to Queen
Over 50,000 families shipped out of London boroughs in the past three years due to welfare cuts and soaring rents
EU asylum policy is 'a direct threat to our civilisation', says Nigel Farage
The Rothschild Libel: Why has it taken 200 years for an anti-Semitic slur that emerged from the Battle of Waterloo to be dismissed?
General Election 2015: SNP and its activists 'openly racist' towards the English, Farage says
General Election 2015: UK will be 'run for the wealthy and powerful' if Tories retain power, Labour warns
Schools forced to act as 'miniature welfare states' with teachers buying underwear and even haircuts for poor pupils
iJobs Money & Business
£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...
£24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...
£16000 - £18000 per annum: Recruitment Genius: An Online customer Service Admi...
£18000 - £22000 per annum: Recruitment Genius: This global, industry leading, ...
Day In a Page
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
Surrounded by the Western fells, this five-bedroom Georgian home retains many original features including panel-plastered ceilings, sash windows and fireplaces.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B, subject to change of use permissions.
A former period coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, office, kennels and an outbuilding that's currently used as a gym.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
This four-bedroom home has exposed brick chimneys and a vaulted ceiling in a breakfast room that's ideal for summer entertaining - the doors open to the patio and garden.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park