OpinionAug 26 2015

Our flat-rate pensions are already in a right state

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Our flat-rate pensions are already in a right state
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If you thought the introduction of the pension freedoms was a shambles – well, you ain’t seen nothing yet.

The introduction of the new flat-rate state pension in April is teetering on the brink of utter confusion. It all rests on the way these reforms were sold to the public. Essentially it boils down to this: everyone was told that they would get the full new state pension of £155 – or whatever the latest quoted figure is – if they had 35 years of NICs.

For a year that was the message from government ministers. But last year, it was revealed that this was not the case and that anyone who had contracted out of the state pension would get a lower amount. The then pensions minister Steve Webb apologised.

It turns out that what the government meant was you had to have paid NICs for 35 years at the full rate to get the full state pension.

So what has happened since? Not a lot – at least not publicly. Behind the scenes, ministers and civil servants are scrabbling around to try to draw up a sensible action plan to explain this mess to workers. But as yet, they have not been able to agree on a reasonable solution.

As a result, thousands of people are heading towards retirement without realising that a nasty shock awaits them.

The department for work and pensions argues that those who contracted out of the state pension should not enjoy the full payout under the new system since they have benefited from paying lower NI for years.

Thousands of people are heading towards retirement without realising that a nasty shock awaits them

That is an entirely reasonable explanation. That they are months away from retirement and still do not know or understand what they are going to get from the state pension is utterly unreasonable.

More to the point, imagine what would happen if an insurer promised its customers they would get a pension of £155 a week if they saved for 35 years – only to then tell them later that, in fact they were going to get far less. I can tell you what would happen: we would be screaming mis-selling.

Yet it is proving a very hard job to convince the powers that be in Whitehall that they are heading for a state pension scandal. Some in the industry have been demanding an explanation – many just want to know what the calculation is to work out someone’s state pension entitlement. I have not met anyone who has yet had a straightforward answer. So if industry experts cannot calculate it, then ordinary people have got no chance.

The new flat rate state pension was supposed to be an end to the confusing and unfair current system. At the moment it is looking more confusing and more unfair than ever.

Equity release must be equitable

In its recent results Legal & General doubled its equity release target to £200m in a year.

That just goes to show the appetite it thinks there is for people to tap into the wealth in their homes.

Equity release is a morally complex area. It is very easy to criticise lending money to pensioners, and the effects of compound interest and early repayment charges on the final debt can be huge.

Critics are queuing up to say ‘I told you so’ when something goes wrong.

As far as I can see, the main objection is that those who use equity release should have saved more during their working lives. That may be true, but this hindsight does not give a practical solution to the situation they are in.

So what are the alternatives if someone does not want to downsize – as many elderly do not? Where else can they, aged 65 plus, borrow at such low rates?

And here is where the burden lies on advisers. The reputation of this entire industry rests on their shoulders. Lenders can make the funds available, but it is the sales process of equity release that is absolutely critical. All small print and the impact of compound interest must be properly explained and borrowers must – absolutely must – be told to talk through the details with their family.

It is the only way of ensuring that this growing sector does not become quickly tarnished.

Wonga – getting it wronga

I happened to catch the new Wonga advert the other day.

The payday loans firm is trying to clean up its image and appear as transparent as possible. But there is one thing it still wants to gloss over – its APR, which is 1,509 per cent.

Of course, any normal person would say this as ‘one thousand five hundred and nine.’ But not Wonga in their advert. It says: ‘one five oh nine’.

If they are so desperate for transparency why this idiotic attempt to deceive by fudging how you say their interest rates. I cannot imagine it fools anyone.

James Coney is editor of Money Mail at the Daily Mail