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.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Finacial products from our partners
Property search
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