24 April 2014

By Neil Duncan-Jordan, National Officer of the National Pensioners Convention

Who would have thought it? Pensions are making the headlines. The Chancellor’s announcement in the recent Budget more or less called time on the flawed annuity market with the idea that future retirees will be able to cash in their pension pots and spend, spend, spend.

Lib Dem pensions minister, Steve Webb was even moved to say he was comfortable with the prospect that an army of future pensioners would be blowing their savings on the latest Lamborghini rather than buying a regular income in retirement. What he didn’t mention was that the latest Lamborghini will set you back £165,000, whereas an average worker’s pension pot is more likely to be around £36,000. In reality, more Robin Reliant than Lamborghini.

He also failed to mention at the time that those taking out their pension pot might find that they are then deemed to have too much money to then qualify for State help towards their care costs. What use is a Lamborghini then when you really need a zimmer frame?

The free market philosophy of allowing individuals to spend their money how they choose echoed across the newsrooms as details of the Budget were dissected in great detail. But this announcement is just the latest in a whole raft of pension changes that this government has ushered in – largely without any serious political opposition or challenge.

Since coming to power, the Coalition government has weakened the UK’s already wobbly pension system. Early on in their term they replaced the Retail Price Index with the lower Consumer Price Index and effectively reduced future pension income for millions of today’s and tomorrow’s pensioners. They pushed ahead with auto-enrolment for workers on low and modest incomes, encouraging them to put 4% of their earnings into a savings pot that cannot guarantee them a pay out at the end of 35 years’ worth of contributions.

Yet in the meantime the private pensions industry gathers billions of pounds every year in contributions before it ever has to pay out. Why couldn’t the state play that role and use the money to invest in public works, rather than allowing the private sector to gobble up the hard earned savings of those who don’t really have anything left at the end of the week to save anyway?

The big idea put forward by Webb and his Lamborghini club is the creation of a single-tier state pension which combines the existing basic and second state pensions together into one payment. It’s less generous than you could get now, workers will have to pay in for five years longer than under the current system and wait up to three years longer before they can draw it out. By any standards, it’s a poor deal – especially for anyone born after 1970 who will inherit all the worse bits of the plan. To add insult to injury, those existing, mainly women pensioners who don’t have very good state pensions won’t even be allowed to join the scheme – and for the next 60 years we will be running a two-tier state pension system.

As a way of addressing this problem, the government has decided that anyone over 55 will be given a 9 month window in which they can buy back lost years of National Insurance contributions. Someone aged 65 will have to wait just over 17 years before they would gain any extra money from the deal and those aged 75 would need to be sure they were going to live more than 12 years before they got any benefit. It’s a huge gamble given that life expectancy for men is still 79 and for women, 82. Some might even argue that the whole drift of pensions policy is to make people contribute more and for longer in the hope that they never get enough time in which to draw it out.

The truth is that pensions tend to be pretty boring. They rarely get people excited until it’s usually too late to do anything about them. But what we are seeing at the moment is the calculated and systematic weakening of the pension system. The state scheme remains one of the least adequate amongst the developed world and this is set to get worse, and good occupational schemes are disappearing fast to be replaced by ones which shift the risk onto the individual. If today’s pensioners rightly think they don’t get a good deal – that’s nothing compared to the problems that future generations are going to face. The campaign for a better and more inclusive state pension that takes all workers out of poverty in retirement is therefore where our efforts need to be directed.

But for the likes of Steve Webb, his retirement will probably be spent racing round Bristol in his Lamborghini.