Safety net is not that safe

A series on pension planning starts off by looking at the state benefits

THERE was a time when the plight of people struggling on an old age pension was a key issue at election time. But now the debate has moved on. It centres not so much on the value of today's pensions but of tomorrow's.

There is a consensus that the welfare state cannot pick up the tab for providing people with a decent income in retirement. In future, the state may provide just a safety net.

Everyone who is 20 or older needs to get a grip of the issues. There are long-term decisions to make now - even on what to do about the state pension. This has two broad elements: the basic pension and Serps - the state earnings-related pension scheme. The current maximum basic pension is pounds 58.85 for a single person, pounds 94.10 for a married couple (or twice the single-person rate if each partner qualifies in their own right). The current maximum for the Serps pension is pounds 94.14. These pensions are taxable. They can be drawn from the age of 65 for today's young workers, or at an earlier age for women currently older than 40.

These state benefits can provide an important element in a portfolio of pensions. And, at present, they have the advantage that they rise every year in line with inflation. But this is price inflation, not pay inflation. The latter has historically been higher. So the value of the state pension is being eroded as a proportion of pre-retirement earnings.

Now, and increasingly in the future, state pensions could well prove insufficient. Which is why joining a company scheme or personal plan is vital for most people.

The level of state pension depends on your National Insurance record. Broadly, to get the full basic pension you must have paid, or have credited, the right type of NI contributions for at least 44 years, or a bit less for women who are more than 40. An incomplete record will produce a lower pension.

The precise rules are complicated. But you can get a forecast of your likely pension entitlement from the Department of Social Security using form BR19, from any DSS office.

But if the rules for the basic state pension are complex, those on Serps are byzantine. Entitlement to a Serps pension depends on the NI you pay on "band" earnings - currently between pounds 58 andpounds 440 a week. Only Class 1 contributions count. Crucially, that means the self-employed are not building up any Serps entitlement.

Many people are automatically out of the scheme. They belong to a company pension scheme that is contracted out. It replaces Serps. But employees who are not in this position have a choice. They can stay in Serps, or contract out through a personal plan. You do not pay less NI by contracting out, nor does it cost you a penny. The Government pays money, related to your earnings, into a personal pension plan of your choice.

You contract out in the hope that invested contributions will produce a bigger pension than you would get by staying in Serps. But it is something of a gamble. There are two general rules. First, the less you earn, the less the advantage in contracting out. Personal plan charges become disproportionate for lower levels of contribution. Second, as you get older, contracting out becomes less attractive. Generally, people over 40 should think carefully before contracting out.

If you do contract out, you will reach an age at which it is right to rejoin Serps. Talk to an independent adviser on this.

q Next week: why company pension plans are a good bet.

world cup 2014A history of the third-place play-offs
Tommy Ramone performing at The Old Waldorf Nightclub in 1978 in San Francisco, California.
peopleDrummer Tommy was last surviving member of seminal band
Life and Style
Swimsuit, £245, by Agent Provocateur

Diving in at the deep end is no excuse for shirking the style stakes

The Mexico chief finally lets rip as his emotions get the better of him
world cup 2014
Spectators photograph the Tour de France riders as they make their way through the Yorkshire countryside
voicesHoward Jacobson: Line the streets for a cycling race? You might just as well watch a swarm of wasps
Life and Style
lifeHere's one answer to an inquisitive Reddit user's question
Life and Style
Several male celebrities have confessed to being on a diet, including, from left to right, Hugh Grant, Benedict Cumberbatch and Ryan Reynolds
...and the weight loss industry is rubbing its hands in glee
peopleDave Legeno, the actor who played werewolf Fenrir Greyback in the Harry Potter films, has died
Mario Balotelli, Divock Origi, Loic Remy, Wilfried Bony and Karim Benzema
transfersBony, Benzema and the other transfer targets
Yaya Touré has defended his posturing over his future at Manchester City
Detail of the dress made entirely of loom bands
Life and Style
There were mass celebrations across Argentina as the country's national team reached their first World Cup final for 24 years
transfersOne of the men to suffer cardiac arrest was 16 years old
Arts and Entertainment
Armando Iannucci, the creator of 'The Thick of It' says he has
tvArmando Iannucci to concentrate on US show Veep
A mugshot of Ian Watkins released by South Wales Police following his guilty pleas
peopleBandmates open up about abuse
Basketball superstar LeBron James gets into his stride for the Cleveland Cavaliers
sportNBA superstar announces decision to return to Cleveland Cavaliers
Finacial products from our partners
Property search
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Biztalk - outstanding opportunity

    £75000 - £85000 per annum + ex bens: Deerfoot IT Resources Limited: Biztalk Te...

    Trade Desk Specialist (FIX, Linux, Windows, Network Security)

    £60000 per annum: Harrington Starr: Trade Desk Specialist (FIX, Linux, Windows...

    Service Desk Analyst (Windows, Active Directory, ITIL, Reuter)

    £35000 per annum: Harrington Starr: Service Desk Analyst (Windows, Active Dire...

    Network Engineer (CCNA, CCNP, Linux, OSPF, BGP, Multicast, WAN)

    £40000 per annum: Harrington Starr: Network Engineer (CCNA, CCNP, Linux, OSPF,...

    Day In a Page

    A History of the First World War in 100 Moments: Peace without magnanimity - the summit in a railway siding that ended the fighting

    A History of the First World War in 100 Moments

    Peace without magnanimity - the summit in a railway siding that ended the fighting
    Scottish independence: How the Commonwealth Games could swing the vote

    Scottish independence: How the Commonwealth Games could swing the vote

    In the final part of our series, Chris Green arrives in Glasgow - a host city struggling to keep the politics out of its celebration of sport
    Out in the cold: A writer spends a night on the streets and hears the stories of the homeless

    A writer spends a night on the streets

    Rough sleepers - the homeless, the destitute and the drunk - exist in every city. Will Nicoll meets those whose luck has run out
    Striking new stations, high-speed links and (whisper it) better services - the UK's railways are entering a new golden age

    UK's railways are entering a new golden age

    New stations are opening across the country and our railways appear to be entering an era not seen in Britain since the early 1950s
    Conchita Wurst becomes a 'bride' on the Paris catwalk - and proves there is life after Eurovision

    Conchita becomes a 'bride' on Paris catwalk

    Alexander Fury salutes the Eurovision Song Contest winner's latest triumph
    Pétanque World Championship in Marseilles hit by

    Pétanque 'world cup' hit by death threats

    This year's most acrimonious sporting event took place in France, not Brazil. How did pétanque get so passionate?
    Whelks are healthy, versatile and sustainable - so why did we stop eating them in the UK?

    Why did we stop eating whelks?

    Whelks were the Victorian equivalent of the donor kebab and our stocks are abundant. So why do we now export them all to the Far East?
    10 best women's sunglasses

    In the shade: 10 best women's sunglasses

    From luxury bespoke eyewear to fun festival sunnies, we round up the shades to be seen in this summer
    Germany vs Argentina World Cup 2014: Lionel Messi? Javier Mascherano is key for Argentina...

    World Cup final: Messi? Mascherano is key for Argentina...

    No 10 is always centre of attention but Barça team-mate is just as crucial to finalists’ hopes
    Siobhan-Marie O’Connor: Swimmer knows she needs Glasgow joy on road to Rio

    Siobhan-Marie O’Connor: Swimmer needs Glasgow joy on road to Rio

    18-year-old says this month’s Commonwealth Games are a key staging post in her career before time slips away
    The true Gaza back-story that the Israelis aren’t telling this week

    The true Gaza back-story that the Israelis aren’t telling this week

    A future Palestine state will have no borders and be an enclave within Israel, surrounded on all sides by Israeli-held territory, says Robert Fisk
    A History of the First World War in 100 Moments: The German people demand an end to the fighting

    A History of the First World War in 100 Moments

    The German people demand an end to the fighting
    New play by Oscar Wilde's grandson reveals what the Irish wit said at his trials

    New play reveals what Oscar Wilde said at trials

    For a century, what Wilde actually said at his trials was a mystery. But the recent discovery of shorthand notes changed that. Now his grandson Merlin Holland has turned them into a play
    Can scientists save the world's sea life from

    Can scientists save our sea life?

    By the end of the century, the only living things left in our oceans could be plankton and jellyfish. Alex Renton meets the scientists who are trying to turn the tide
    Richard III, Trafalgar Studios, review: Martin Freeman gives highly intelligent performance

    Richard III review

    Martin Freeman’s psychotic monarch is big on mockery but wanting in malice