Simon Read: The Coalition is putting politics ahead of proper pension planning
Simon Read is Personal Finance Editor at The Independent. He edits the Saturday Your Money section and writes the Daily Money column and Wednesday’s Midweek Money section in i newspaper. He also writes for the news and business pages of the Independent and i newspaper and is a regular money commentator on TV station London Live. He has won numerous awards including Consumer Finance Journalist of the Year.
Saturday 22 September 2012
What a poor week it's been for the Coalition Government. First Nick Clegg was forced into a grovelling apology for ripping up the Liberal Democrats' pre-election pledge to fight rises in student fees. Then David Cameron was reported as demanding a rethink of a flagship state pension policy that was set to introduce a flat-rate benefit of £140 a week for all pensioners.
The latter could lead to potential problems and confusion for millions. The news that there's been a rethink on the bold reforms of the state pension scheme announced by the Coalition soon after it came into power sent ripples of fear through the pension industry.
Steve Webb, the Pensions minister, confirmed on Wednesday in a speech to pension bigwigs that the policy is being watered down. Despite having promised to bring out a White Paper – setting out full details of the reforms – last spring, the Government has failed to deliver.
This week Mr Webb said that while a paper would be published this autumn, it won't – after all – be a prescriptive white one. Instead it will be a hybrid between an authoritative White Paper, which sets out policy, and a consultative Green Paper, which sets out topics to be discussed.
Despite announcing the reforms some 18 months ago, Mr Webb claimed: "There's a lot of detail and it's important to consult on that. I suppose you could call it [the autumn paper] minty."
What's the problem here? When the universal flat-rate state pension was first proposed it was acclaimed by virtually all parties. To remind you why, let's examine the current state pension system.
It's made up of three parts: basic state pension, second state pension (known as S2P), and pension credit. Workers need to have paid into National Insurance for 30 years to get the full basic state pension of – currently – £107 a week. Anyone paying in less gets paid out less.
So far, so clear. But then higher-earners pay more in National Insurance, so – through S2P – they can boost their state pension payout up to as much as £167 a week.
Understand? Hang on, there's more. A means-tested element – that's pension credit – allows low-earners to boost their basic entitlement to a minimum of around £142 a week.
Does all that sound fair? It's certainly confusing to me and, I suspect, most pensioners who end up getting less than they expected because of the complicated rules.
So the Coalition proposed to introduce from 2015 a simple system where all pensioners who had paid into NI for 30 years would be given a basic flat-rate of around £140 in today's money. Those who had paid in less would get less, as in the existing system.
The reforms not only simplify the state pension system, but the proposals are also budgetary neutral, which means, in short, they would cost us no more money.
They would also do away with the existing pension inequality. The current means-tested system has left many millions penalised for saving for their retirement, as those that have done absolutely nothing have simply qualified for bigger state payouts.
So we've been looking forward to the introduction of a simple-to- understand and fairer state pension scheme. That's crucial for all of us trying to plan ahead for retirement as, if we know how much we will get from the state, we can work out how much we need to save to boost our income to a decent level when we stop working.
With that in mind, why the backtracking this week? Experts blame political expediency. A flat-rate state pension would mean high-earners would lose their extra payouts. And, traditionally, which party do higher earners tend to vote for? Yes, the Tories.
The Government clearly didn't get its party political hats on when announcing the policy, as it's the timing that has seemingly thrown a spanner in the works. The reforms were planned to be introduced from 2015. But someone at Number 10 has presumably only just realised that alienating a lot of your traditional voters – the high-earners – just after the next election in 2014 is a little foolhardy.
So the Government will, it seems, delay the introduction of a flat-rate pension until some years later, so the issue doesn't become a political hot potato in 2014.
In doing so the Coalition has let us down badly. We need certainty in our pension planning, not political posturing.
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