New flat-rate state pension plans unveiled

Plans for a new flat-rate state pension and a system to automatically raise the pension age have been published.

Plans for a new flat-rate state pension and a system to automatically raise the pension age have been published.

Under government proposals the existing means-tested arrangements would be replaced for new, but not existing, pensioners.The current full state pension is £97.65 a week, but can be topped up to £132.60 with pension credit.

This could be replaced by a new £140 flat rate, with inflation expected to push this up to £155 by 2015 or 2016.

A second, less radical option would see a set amount of state second pension paid for each qualifying year of National Insurance contributions.

No set date for implementation has been revealed.

Simplification

The plans are aimed at simplifying the system, and encouraging people to save for their retirement by knowing exactly what they would get from the state.

“Tomorrow’s pensioners do face a very different world,” said Pensions Minister Steve Webb.

“They will, on average, be working for a lot longer, they will be retired for longer, they will not on the whole have final salary guaranteed pensions in the way that perhaps their parents did.

“We therefore need a simpler, clearer foundation because more of them will now be asked to save for their retirement.”

Work and Pensions Secretary Iain Duncan Smith said: “We have to send out a clear message across both the welfare and pension system: you will be better off in work than on benefits and you will be better off in retirement if you save.”

The state pension age will rise to 66 for both men and women by 2020.

The government’s proposals suggest that this should continue to rise automatically in line with longevity.

This could be done either through a formula linking pension age to average life expenctancy, or through a regular official review.

Changes

Under current arrangements, a minimum income guarantee ensures couples get £202.40 a week through the means-tested pensions credit. 

A green paper opens consultation on a new simplified state pension that would end the means-tested element of the state pension.Two options are suggested. One is a universal £140-a-week payment to anyone who has 30 years of National Insurance contributions.

The second would bring forward plans to replace the second state pension with a payment of £1.60 for each qualifying year. So, somebody with 30 years of contributions would receive £97 in basic state pension and £48 in state second pension, making a total of £145 a week.

Caring for a young child or an elderly dependant would count as a qualifying year, in the same way as a year in employment. 

But it is the option of a universal flat-rate payment that would be the biggest overhaul of the system for decades. 

Some of the key points will include: 

• The flat-rate pension will only be available for new pensioners reaching state pension age, rather than the millions of existing pensioners
• The basic state pension will rise each year in line with average earnings, the Consumer Prices Index measure of inflation, or 2.5%; whichever is the greater
• The state second pension will be abolished, but the government would honour contributions that had already been made ahead of the change
• At least 30 qualifying years of National Insurance contributions will be required for the full state pension. A minimum level of seven years will be set, under which no state pension will be paid.

The proposals, if given the go-ahead, could create a two-tier system of state pension for some time. 

Existing pensioners, when the system changed, would still gain their entitlement under the old system, but those who reach pension age after the changes come in would get the new flat rate. 

So, as a result, a 76-year-old could get a different amount to a 66-year-old after the changes come in. 

“I want to make it clear there is no extra cash for new pensioners,” Mr Webb told the BBC News website. 

A date could be set, so those who reach pension age the day before the changes would spend their retirement years under the old system, whereas somebody who hits their pension age birthday the day after the changes would receive their pension under the new system.

Key issues

This plan would also bring “contracting out” arrangements to an end, where some people pay lower National Insurance contributions because their second state pension is contracted out to their company final-salary pension scheme.

As a result, these people’s National Insurance bill would rise, but their state pension would also be greater. The extra cost to employers could also push more to close their final-salary schemes.

Joanne Segars, of the National Association of Pension Funds, said: “The end of contracting out by defined benefit pension schemes is an inevitable part of simplification.

“But the government must make an early promise that it will make it simpler for schemes to contract back in. It must not load extra costs and red tape on these pension schemes, which are under severe pressure.”

More than one-and-a-half million eligible pensioners do not claim pension credit, and the government believes that such individual losses of entitlement would not occur under a simpler flat-rate system.

The self-employed, and some women, are also likely to benefit, as National Insurance rules have meant they have tended to get a lower state pension.

However, there is likely to be debate about the fairness of a flat rate that makes no distinction between poor and wealthy pensioners.

Rachel Reeves, the shadow pensions minister, said: “A pension system that would deliver £155 for everyone is a welcome step, and we will look carefully at the details of the government’s announcement, especially the effect on women’s retirement income.”

But she added that the state pension age was rising faster than planned for hundreds of thousands of women.

“While we welcome proposals which could help future pensioners, we urge the government to rethink on help for today’s pensioners and for the people hit hardest by increasing the state pension age by up to two years,” she said.

Source: BBC News website: http://www.bbc.co.uk/news/business-12954888

Minister may raise pension age to 70

Britain is being pushed back to ‘the days of Dickens’ by plans to force workers to retire as late as 70, it was claimed last night. 

Ministers warned that millions of workers face the prospect of a retirement date which slips farther from their grasp every year. 

Work till you drop: The pension age is set to rise and rise.

In a major shake-up of state pensions, the Government said the age at which people can get their pension could jump in line with rising life expectancy.

Yesterday it revealed a fast-track, six-week review into the state pension age, currently 60 for women and 65 for men.

Under its current proposals, the state pension age will rise to 66 ‘no sooner than’ 2016 for men and 2020 for women – nearly a decade earlier than Labour’s original proposals.

Labour had also proposed a rise to 67 between 2034 and 2036 and 68 between 2044 and 2046.

But Steve Webb, pensions minister and a LibDem MP, said he was considering ripping up these plans, and raising the state pension age even higher to reflect increasing life expectancy.

He insisted that any new formula would not just be a ‘crude’ link between the two, but warned that leaving the age unchanged is ’simply not an option’.

The proposals triggered a storm of protest last night, with unions and campaign groups warning that they would unfairly penalise manual workers and the poor whose life expectancy is lower.

Bob Crow, general secretary of the Rail Maritime and Transport union, said: ‘If you are a rich banker with a private pension, you can sail off on your yacht at 55. But, for working men and women, retirement will be pushed further and further over the horizon in a step back to the days of Dickens.’

Work and Pensions Secretary Iain Duncan Smith said big increases in life expectancy left the Government with no option but to raise the age at which a state pension can be claimed.

In 1926, when the first contributory pension was introduced, only 34% of men and 40% of women were expected to reach 65. Today, one in four baby boys should reach the age of 100.

Experts said today’s workers should accept that their retirements will be dramatically different from those enjoyed by their own parents.

Laith Khalaf, a pensions analyst at financial advisers Hargreaves Lansdown, said: ‘Today’s children could well be working into their seventies as the state pension adjusts to rises in life expectancy.

‘They will barely believe that their parents and grandparents retired at such a young age. Retiring in your sixties could become a thing of the past unless you build up a big enough pot of private savings while you are working.’

Dot Gibson of the National Pensioners’ Convention said the move would lead to the poorest being forced to ‘work until they drop’.

She said: ‘There can be no doubt that the wealthier you are, the longer you live, therefore raising the retirement age is a direct attack on the very poorest in our society.

‘This policy isn’t about choice. It is about cutting costs.’

It is estimated that the taxpayer will save around £13bn for each year that the state pension age is raised.

Ros Altmann, a former No 10 pensions adviser, said moves to increase the pension age in line with life expectancy were ‘inevitable’.

She predicted a ’social revolution’ with soaring numbers of older people working part-time.

John Cridland of the employers’ organisation the CBI, said: ‘We are in favour of raising the basic state pension age gradually over time, probably reaching 70 by 2030.’

˜ French workers caused widespread disruption yesterday over far more modest plans to raise the retirement age to 62.

Trains and flights were cancelled, schools were closed and newspaper production was halted as unions staged an angry response to measures described by President Nicolas Sarkozy as ‘unavoidable’.

Even under Mr Sarkozy’s plans, French pension rights would remain untouched until 2018, when the retirement age would rise from 60 to 62.

But many French people, long accustomed to generous social benefits, are determined to resist the reforms.It is not uncommon for 60-year-olds in France to retire on virtually the same income as when they were working. 

Source:  http://www.thisismoney.co.uk/pensions/article.html?in_article_id=507025&in_page_id=6

It’s time to take politics out of pensions

We can no longer trust politicians to take care of our pensions, say experts. Instead, they should hand control to an independent body…

Out with the old: Pensions and politics don't mix well, say experts

After years of political meddling, Britain’s once-proud pensions system lays in ruins.

Criticised for being over-complicated and unrewarding, pensions have been rejected by millions of Britons, despite huge swathes of us facing terrifying gaps in our retirement savings.

Fewer than 40% of the working-age population has any pension whatsoever, thanks in no small part to an overly complex system that’s constantly changing.

Now, as the coalition government battles to cut the UK’s bulging deficit, pensions face the threat of the Chancellor’s axe once again.

Already, we know the state retirement age is to rise with sharp and immediate effect, forcing millions of us to work into past our 70th birthday.

Meanwhile, public sector workers have braced themselves for dramatic cuts to their ‘unsustainable’ old age benefits.

And as if that wasn’t enough, the new Government has now knocked a potential £100bn off the value of private final salary pensions in its first ’stealth cut’.

How can we plan for the future if every new government changes the pensions goalposts? How can we be sure our pots won’t be unceremoniously raided in years to come?

We can’t. It’s as simple as that.

Experts fear that there may only be one way to make pensions good again: ban party politics altogether.

Giving power to an independent body, they say, could pave the way for the essential, sustainable reforms needed to stave off a nationwide retirement crisis. Finally, pensions could be made attractive again.

And after the emergency Budget left ‘the most important pensions questions answered’, the clamour to take politics out of pensions has intensified.

Former Treasury adviser, Ros Altmann, has called for a new non-political commission of the best pensions minds to work closely with new minister, Steve Webb, to overhaul the current system and introduce sustainable policies.

‘You’ll work till you drop’: Britons stop saving into pensions

Pensions are too important for politicians

Once properly reformed, overall responsibility for Britain’s pension system could then be permanently handed over to this independently-appointed body, ending the political toing-and-froing that has tainted the past 30 years.

Altmann said: ‘We need an independent body responsible for pensions. These issues are too important to allow party politics to stop decisions being taken for the good of the country.

‘If we had an independent body that’s set in and lasts, we could begin to get to grips with what has become a very serious crisis by making sure that pensions policy stays out of political meddling in future.’

Every week a new report shows the financial torture awaiting many of the Britons who will retire in the coming decades.

Nearly 20% of over 55s still have a mortgage, with an average loan of £50,000, described by insurer Aviva as ‘a significant debt burden’.

Furthermore, a quarter has less than £2,000 in savings, while only 13% have more than £100,000 to see them through old age.

It means millions of over-50s are on a ‘collision course with an impoverished retirement’, with almost eight in ten set to receive an annual income worth less than £8,000.

It smacks of an uncomfortable reality: a generation of Britons has lost touch with the ’savings culture’, disillusioned by constantly flip-flopping pension saving rules and a general lack of clarity when it comes to state benefits in old age.

Now just 14.5m Britons – fewer than 40% of the working-age population – have any sort of pension, according to the Department for Work and Pensions.

Source: http://www.thisismoney.co.uk/pensions/article.html?in_article_id=504342&in_page_id=6

Pensions Tax Changes For High Earners

Pensions tax changes for high earners criticised

The government’s plans face growing criticism The government’s plans to tax the pension contributions of high earners have been criticised as “complex, unfair and inefficient”. The Institute for Fiscal Studies (IFS) also says many wealthy people will simply alter their pay arrangements to avoid the new taxes. From April 2011, the government hopes to raise an extra £3.6bn a year from about 300,000 top earners. That is on top of a new 50% tax rate and the withdrawal of tax allowances. Those two measures, starting next month, will raise about £3.9bn by phasing out the universal personal income tax allowance from anyone earning over £100,000, and by taxing people at 50% on their earnings over £150,000. The pension tax changes, which will come in a year later, will steadily reduce the tax relief high earners can obtain on their own pension contributions, once they earn over £150,000. And some high earners will be taxed on the value of the pension contributions made by their employers. This could affect people with gross pay of just £130,000 if the benefit of their employers contributions pushes them above a proposed £150,000 limit. “The average tax increase would be a whopping £12,000 per affected person per year,” said Carl Emmerson, deputy director of the IFS. Salary sacrifice The government wants to restrict the amount of pension tax relief given to high earners. Higher rate tax payers were given 65% of the £28bn granted in pension tax relief in 2008-09, though they make up just 19% of pension savers. And the very highest earners, the 1% of adults whose income is over £150,000 a year, gained 25% of all pension tax relief, worth an average of £20,000 a year to each of them. The IFS argues that it would be possible for many of them to alter their pay arrangements by using a concept known as “salary sacrifice”, in which they take smaller salaries in exchange for larger pension contributions. By doing this some could depress their earnings below the £130,000 starting point for the new pension tax restrictions. “Treasury figures suggest that nearly two-thirds (63%) of the 300,000 individuals potentially affected by this reform are members of defined contribution schemes, which are inherently more flexible [than final-salary scheme],” said Mr Emmerson. “The scope for some individuals to respond to this reform in a way that minimises its impact on their lifetime tax bill must mean that estimates of the Exchequer gain from the reform are subject to a large degree of uncertainty.” Tax-free cash The IFS suggested that one alternative to the government’s plans would be to restrict the amount of tax-free cash people can take from their pension pot when they retire. “The most obvious anomaly is the fact that individuals can take up to 25% of their pension as a lump sum free of income tax up to a maximum of £437,500,” it said. “A reform that placed a much smaller cap on the amount that can be taken as a lump-sum would improve value for money for the public purse as there is no obvious justification for providing such a generous amount tax free,” it added. The government is currently consulting on its pension tax proposals before finalising details of any changes. Last week, the National Association of Pension Funds said the proposals would do “enormous harm” to company pension provision and called on the government to abandon its plans.

Source: BBC News  http://news.bbc.co.uk/1/hi/business/8543505.stm

Conservatives plan to restore dividend tax credit

The Conservatives will reverse the effects of Labours abolition of dividend tax credit for pension funds.

Bank Of England Keeps Interest Rate On Hold

The Bank of England has announced its decision to hold the interest rate and pause its programme of pumping newly-created money into the economy.

The Monetary Policy Committee’s move was widely predicted by the City, including all members of the Sky News Money Panel. They expected the Bank to shift into “wait and see” mode to judge the strength of the recovery.

The Bank last week finished the latest round of quantitative easing (QE), bringing the total amount of newly-created money spent on Government and company bonds to £200bn.

In a statement, the Bank said: “The committee noted that this stock of past purchases, together with the low level of Bank rate, would continue to impart a substantial monetary stimulus to the economy for some time to come.

“The committee will continue to monitor the appropriate scale of the asset purchase programme and further purchases would be made should the outlook warrant them.”

The MPC’s no-change position, which leaves the cost of borrowing at its historic low level of 0.5%, follows a surprisingly weak climb out of recession in the final quarter of last year.

The UK’s longest and deepest economic downturn officially ended with growth of just 0.1% in the last three months of 2009, leading to fears of a so-called “double-dip” recession.

As a result, some economists rightly predicted the Bank would keep the door open to more QE if the economy continues to struggle.

City expert David Buik, of BGC Partners, told Sky News: “I think the Bank of England is absolutely right to be very cautious and vigilant.

“It wouldn’t surprise me at all if, in the advent of higher taxation almost certainly coming later this year, the Bank had to inject another £25bn, say, in another three months’ time.”

MPC members had access to detailed economic forecasts from the Bank’s forthcoming quarterly inflation report during their two-day meeting.

Recent signs on the economy have been underwhelming, with figures from the UK’s crucial services sector showing slowing growth last month after disruption from the snowy weather.

Meanwhile, Consumer Prices Index inflation jumped at a record rate to 2.9% in December – well above the Bank’s 2% target.

There are concerns among committee members that inflation may become a problem, although the weakness of the banking sector and credit availability are pushing prices in the opposite direction.

Source: Ed Merrison, Sky News Online

Tories vow to axe compulsory annuities

The Conservatives have pledged to scrap laws which force savers to purchase an annuity by age 75, if the party gets into power.

In a Tory document, A New Economic Model, published yesterday, shadow chancellor George Osborne said that he would axe the much maligned rule of compulsory annuitisation at age 75.

Under current laws, savers have to use their pension savings to purchase an annuity by age 75, which will provide them with an income for their remainder of their life.

But annuity values have plummeted in recent times to an all-time low – offering savers very poor value. Retirees buying an annuity today are getting pension incomes of almost half the level of their counterparts back in 1994.

Commenting on the proposal,  a pensions expert at a well known adviser group, says: ‘The Conservative proposal to scrap the age 75 compulsory annuitisation is a good one. There is no decent justification for forcing investors to buy an annuity.

‘There are currently around 450,000 people aged 74 and the best part of 2.5m between the ages of 70 and 74. A fair proportion of them will not want to buy an annuity. Ever.’

What does an annuity get me?

Research from the financial information firm Moneyfacts looked at what annuity a £10,000 pension pot can buy.

In 1994, a 65-year-old man could have received an average annual payout of £1,145. Today, he would get just £625, a drop of 45%. This would leave someone with a £100,000 pension pot getting £6,250 per year, rather than £11,450.

Each year, around 450,000 people buy annuities with pension pots averaging £25-£30,000.

The average buyer is 63, but the age is likely to rise as workers realise the income would be too low to let them retire. The state retirement age is 65. Notably, the Association of British Insurers, the mouth-piece for the pensions industry, recently called for the age at which people have to buy them to be pushed up to 80.

Research shows that the vast majority of pension funds, at 88%, are worth less than £50,000 at retirement. For investors with small funds, an annuity will continue to present the most efficient way to eliminate investment and longevity risk.

The pension expert said: ‘Changing the rules would benefit those who have a more substantial fund or a secure source of income elsewhere, for example from a final salary scheme. It would also send an important message to prospective savers; that they will be able to retain control of the money that they have saved up. This in turn will encourage more people to engage with the pension system in the first place.’He added that he would like to see one further option, which is for investors to be able to bequest undrawn pension funds on death to their children’s pension funds, thereby keeping the money in the pension system, ‘encouraging thrift and helping to avert the next generation’s own pension crisis’.How do I get the best annuity?The key for savers right now is to ensure that they shop around in order to find the best annuity deal available to them, as opposed to just settling for what their pension company offers. Typically about a third of people fail to look elsewhere, although it is frequently possible to find a better deal.

Source of Article: www.thisismoney.co.uk

Jigsaw Corprate Financial Management can help clients find the best deal on an annuity.

Retirement Age “Should be Scrapped”

Equality commission says an ageing population and increased willingness among older people to work should see default retirement age scrapped

The government will reassess enforced retirement over the coming months. Photograph: PR/Asda

Workers should be able to stay in their jobs beyond the age of 65, and employers should be incentivised to allow older employees to work flexibly, the UK’s equality watchdog said today.

The Equality and Human Rights Commission (EHRC) said the ageing population and an increased willingness to work among older people meant it was time for the government to scrap the default retirement age, a law which allows firms to force staff to finish work at 65.

It said scrapping the rule would remove the “safety net” for employers and encourage more radical approaches to issues such as flexibility, handling the performance of workers of all ages, and improving occupational health.

Hand-in-hand with this change, EHRC said, the government should extend the right to request flexible working to all employees and consider introducing incentives for flexible employers, with a particular emphasis on the over-50s.

The commission said the economy “would be the biggest winner” from the proposed changes, with research from the National Institute of Economic and Social Research suggesting that extending working lives by 18 months would earn Britain £15bn.

The government is currently looking into changes to the rule, and has indicated it could eventually scrap it entirely.

A survey of 1,500 workers by the commission suggests a rule change would be welcomed by many workers. It found that 64% of women and 24% of men wanted to remain economically active after the state pension age (currently 65 for men and rising to 65 for women by 2020).

Around 60% said they wanted to continue working but on a part-time basis, while 40% said they would like to stay in their current jobs but with greater flexibility in hours worked.

The commission’s deputy chair, Baroness Margaret Prosser, said it was time to move away from systems put in place when people died not long after reaching state pension age.

“Britain has experienced a skills exodus during the recession, and as the economy recovers we face a very real threat of not having enough workers – a problem that is further exacerbated by the skills lost by many older workers being forced to retire at 65,” she said.

“Keeping older Britons healthy and in the workforce also benefits the economy more broadly by decreasing welfare costs and increasing the spending power of older Britons.

“Our research shows that to provide real opportunity to older workers, abolishing the default retirement age needs to be accompanied by a concerted drive by government, employers and agencies to meet the health, caring and work needs of the over-50s to enable them to remain in the workplace. Greater flexibility can help to deliver this.”

A spokesman for the Department for Work and Pensions said the government’s long-term aim was to consign fixed retirement ages to the past.

“We have already committed to bringing forward our review of the default retirement age to this year. We are taking evidence now from business and individuals on the impact of retirement ages,” he said.

“Our review will reach a decision after full consideration of the evidence on whether the default retirement age is still appropriate.”

Source of article: http://www.guardian.co.uk/money/2010/jan/25/retirement-age-scrapped-equality-commission

Changes to the State Pension from 6 April 2010

The State Pension is changing from April 2010. This means more people will qualify for a full basic State Pension. Find out about the most important changes and what they will mean for you.

Qualifying for a State Pension

From April 2010, the way you qualify for a State Pension is changing:

• it will be easier for parents and carers to build up qualifying years of National Insurance and get a State Pension
• to get a full basic State Pension, you will only need 30 qualifying years of National Insurance contributions

(At the moment, men normally need 44 years and women 39 years.)

• once you have built up a single qualifying year of National Insurance you will qualify for at least some basic State Pension

If you’re over 55, or if you care for someone, you should find out how the changes may affect you. You should also find out if you need to take action now.

Source: http://www.direct.gov.uk/en/Pensionsandretirementplanning/StatePension/DG_069498

UK Economy Emerges From Recession

The UK economy has come out of recession, after figures showed it had grown by a weaker-than-expected 0.1% in the last three months of 2009.

The economy had previously contracted for six consecutive quarters – the longest period since quarterly figures were first recorded in 1955.

There have been recent recovery signs – last week, UK unemployment fell for the first time in 18 months.

The UK’s had been the last major economy still in recession.

Europe’s two biggest economies – Germany and France – came out of recession last summer. Japan and the US also emerged from recession last year.

‘Below expectations’

“We can say that Britain has just crossed the line in coming out of recession,” said BBC chief economics correspondent Hugh Pym.

“It [the growth figure] was below analysts’ expectations. The figure could be moved down, or indeed upwards.”

 How the ONS announced the UK had emerged from recession

Our correspondent said the move out of recession had been greatly boosted by the government car scrappage scheme.

Joe Grice, from the Office for National Statistics (ONS), said the UK’s production and service sectors each grew by 0.1% during the quarter.

The ONS figures also showed that GDP fell by a record 4.8% in 2009.

“The Q4 GDP figures are a major blow to hopes that the UK economy had emerged decisively from recession in Q4,” said analyst Jonathan Loynes at Capital Economics.

“No doubt some commentators will claim that the figures are under-estimating the true strength of the recovery and will be revised up in time.

“That is certainly possible. But it won’t change the big picture of an economy still operating way below both its pre-recession and trend levels of output.”

‘Frail’ recovery

The UK recession began in the April-to-June quarter of 2008, and was the longest UK recession on record.

During 18 months of recession, public borrowing increased to an estimated £178bn, while output slumped by 6%.

After the GDP figures were published, John Wright, chairman of the Federation of Small Businesses, said that the recovery remained “frail”.

In order to strengthen the recovery it is important that we boost consumer confidence and demand and that interest rates are held steady as continued investment in the economy will be the key to ensuring a sustainable recovery,” he said.

Meanwhile, Lee Hopley, chief economist at manufacturers organisation EEF, said: “Whilst today’s data confirm that manufacturing is now out of recession, they also continue to raise questions over the health of the wider economy.

“The trajectory for the recovery, particularly in the next six months, is an uncertain one and the best prospects remain an export-driven turnaround.”

First estimates of how the economy has performed are made with about 40% of the data available, and Investec economist David Page has warned there is “plenty of room for surprises” in the figures.

But the BBC’s Economics Editor Stephanie Flanders said: “Even with some revision – in fact, even if it turns out that the economy actually started top grow in the third quarter, given that the first estimate of a decline 0.4% has already been revised up to -0.2% – we are still talking about an extremely lacklustre recovery.”

‘Staggering’

Chancellor of the Exchequer Alistair Darling said he was now sure that “we are on a path to recovery.

“I’m confident but I’ll always remain cautious”.

But Shadow Chancellor George Osborne told the BBC that the UK needed a “new model of economic growth” under a Conservative Government.

He added: “Let’s be clear – this is about as weak growth as you can get.”

Liberal Democrat Shadow Chancellor, Vince Cable said the markets would be surprised that growth had been markedly slower than expected.

“Far from the quick recovery the chancellor has been praying for, the economy is only just staggering back into growth,” he said