Pensions aren't a problem for this government, which makes its concern all the more laudable

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The Independent Online

The first thing to be clear about is that the pensions crisis - the fact that our ageing population is not saving enough to provide decent pensions in old age - is a lot better than the alternative. The alternative would be a population that was not only dying younger but also having worse health in old age. Not many of us would think of that as a great outcome.

The first thing to be clear about is that the pensions crisis - the fact that our ageing population is not saving enough to provide decent pensions in old age - is a lot better than the alternative. The alternative would be a population that was not only dying younger but also having worse health in old age. Not many of us would think of that as a great outcome.

The second thing is that it is not a crisis in the sense that it will soon reach a point of no return, where it either gets better or gets worse. It is exactly the opposite sort of problem - a slow, long grind that gradually gets more and more serious unless it is tackled. It does not require immediate action. However, the earlier action is taken the easier it will be to pick a way through.

That is why Adair Turner's report today deserves a warm and, more importantly, a thoughtful reception.

Whereas at present there are three people of working age for everyone over the age of 65, by 2015 there will be a bit over two and a half and in 2050 about one and a half. The reason is twofold. People are having smaller families, with mothers having 1.7 children on average compared with 2.5 in 1970. And we are living longer.

If you have a rising proportion of the people in a country over retirement age and a stable or even declining workforce there are really only four things that you can do about it.

One is to accept that older people will be poorer in old age: certainly poorer relative to people at work but also maybe poorer than their parents would have been in their retirement years.

Two is to get people to work for longer: either to retire later or to take on some kind of a job, possibly part time, after their formal retirement.

Three is get people to save more for their retirement while they are still at work, either by putting more into a pension or by saving in other ways.

And four is to persuade people who are at work to pay higher taxes to support the rising army of the elderly.

There really is nothing else. Immigration can postpone the problem to some extent but the scale would have to be huge - much larger than the immigration over the past decade - to have much effect. In any case the new immigrants too would become older and then would need to be supported in their old age.

Each of those four courses of action has obvious political disadvantages. It really would not be acceptable, or possible in a democracy, for older people to have declining living standards. Putting up the retirement age is likely to happen - already 65 will become the standard for both men and women, not just for men - but it is pretty unpopular.

Persuading people to save more is difficult, for tax incentives are not necessarily effective, and as yet the Government has decided not to make saving compulsory. Many people might think that was simply another form of taxation, and given their experience of national insurance - which was presented as a savings scheme for old age - they would be right. And if working people have to pay more in tax, many might decide to downshift their jobs and take more leisure, while a few might simply move to lower-tax regimes, as happened in Britain in the 1970s.

But this is not really much of a problem for this government, nor indeed the next one. The pension crunch comes from about 2010 onwards as the "baby-boomers", born in the late 1940s and early 1950s, reach retirement age. Then, relentlessly, year after year, the burden rises. So in a way the Government is showing unusual foresight to flag this issue up now.

While the UK has a serious problem it is not as serious as that of most continental European countries, where the demographic shift is even more dramatic. The reason it commissioned the Turner report is to make our whole society more aware of the tough choices ahead and to encourage individuals to take more responsibility for their own pension planning.

The Turner report is about private and state pensions. The state will have to take the ultimate responsibility for providing for its older people. But the total resources even a government can command will seem small when set against the demands on it. The more it can persuade people of working age both to carry on in some kind of work and, as far as possible, to make their own provision for the future, the greater the ability of future governments to direct funds to the most needy.

For the rest of us, the more we save, the sooner we will be able to retire. Simple, really. Who says pensions are complicated?

HOW MUCH DO YOU NEED TO SAVE?

By James Daley

There's no easy answer to the question of how much you should be saving for retirement. But unless you're working for the civil service, or for a company with a generous final salary scheme, it's almost certain that you're not putting away enough.

According to Stephen Yeo, a senior consultant for Watson Wyatt, a good rule of thumb for working out how much to save, is to take the age at which you start your pension, and half it. The number you are left with, is the approximate percentage of your salary you should be contributing every month if you're going to end up with enough to keep you in the kind of lifestyle you are accustomed to.

That means that if you don't start saving until you're 40, you'll need to be putting about 20 per cent of your salary away every month.

While many people suggest that the equity in their property will be enough to provide for their retirement - don't bank on it. Most equity release schemes allow you to get your hands on a maximum of around 40 per cent of the value of your house. So with the average UK house property worth around £130,000, that would give you just £52,000 to buy an annuity with - providing you with an income of only an extra £50 a week.

Tom McPhail, the head of pensions research for Hargreaves Lansdown, the Bristol-based financial advisers, says the only way to guarantee yourself a good retirement income is to start saving early. However, he cautions that if you're sitting on lots of debt, other than a mortgage or student loans, it is probably worth clearing this before you start saving in earnest.

"If you've got high-interest debt, such as a credit card charging 19 per cent a year, then it probably does make sense to clear that off first," he says. "Because you're not going to get a 19 per cent return on your pension."

After that, Mr McPhail advises that you keep a bit of cash in the bank or building society for emergencies, and then start your pension. He adds that its worth putting some of your retirement savings into an Individual Savings Account (Isa) instead of a pension.

"Although pensions are the most tax-efficient way of saving, you can't get your hands on it until you're at least 50, so it may make sense to keep some money in an Isa as well," he says.

While its difficult to know exactly how much you'll need for your retirement, a good rule of thumb is to work towards having around 50 per cent of your final salary. Most people have paid off their mortgage by the time they retire, and their overheads are considerably less. But if you're planning on retiring to Monte Carlo, you may need to put away a little more.

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