Pensioners are under pressure as never before. Financial advisers are well aware of the challenges facing private pensions, whether from disappointing investment returns or soaring annuity costs. However there is now growing pressure on state pension benefits too.
Politicians from all parties have pensioner incomes in their sights as they search for ways to reduce public spending. There are serious concerns that even the state pension may be a target for spending cuts because of the rapid rise in pensioner numbers in coming years.
Labour has suggested the state pension would be included in any future welfare spending cap, while the government has refused to commit to maintaining its much-vaunted ‘triple lock’ on state pension increases beyond 2015, suggesting that the existing protections for state pension uprating may be removed. The ‘triple lock’ was introduced in 2010, with the Coalition Government committing to protect the basic state pension’s value by increasing it every year of this parliament in line with average earnings, or inflation (but only the consumer price index inflation measure rather than the retail price index) or 2.5 per cent, whichever is greater. This commitment was meant to ensure that the bedrock of pensioner support in our national insurance system, the basic state pension, was protected in value. Such protection seems now under threat.
It is rather a worrying time to be in or near retirement. Record numbers of people are approaching pension age so the costs of providing state pensions will obviously rise. The demographic challenges have not been met so pensioner incomes are now under threat.
The ‘triple lock’ was a significant commitment to improve the basic state pension, currently £110.15 a week and one of the lowest in the developed world. Since the link with average earnings was broken after 1979, the basic state pension fell well behind average earnings, but after 2000 the government has tried to repair the damage. It has lifted millions of pensioners above the poverty line, which is significant social progress. However these major improvements have been achieved by increased means-testing with nearly half of UK pensioners now entitled to means-tested support. Means-testing pensioner incomes is inefficient and ineffective because many people do not claim. By relying on means-testing, rather than paying a decent basic minimum pension, the government has undermined the suitability of private pensions for the mass market. In recognition of this the new single-tier pension, which forms the centrepiece of the Pensions Bill currently going through parliament, is designed to increase the basic pension level above the means-tested guarantee credit of pension credit. The ultimate aim is to ensure a single state payment for pensioners from the national insurance system that will be fairer to women and provide at least a basic minimum level of social support. At the moment, on top of the basic state pension itself, many pensioners receive extra amounts of earnings-related state pension from past national insurance contributions but after 2016 the basic and additional pensions will be joined together to provide a new single-tier state pension of around £144 a week, in today’s money, for all those with a 35-year national insurance record.
This would help advisers give clients a simple message. When you reach later life the state will pay you a state pension of £144 a week. That is it. If you want more than this base level of income, you have to plan how to achieve that. I can understand that the government is reluctant to commit to the ‘triple lock’ as the number of pensioners grows in coming years. However it needs to ensure that pensioners do not fall into poverty again.
My proposal, therefore, is that the government should commit to at least a ‘double lock’ – uprating state pensions by either earnings or prices, whichever is higher. This year as both earnings and CPI inflation were below 2.5 per cent, the basic state pension went up by the 2.5 per cent figure so pension increases outstripped other income. The commitment to a 2.5 per cent increase is rather an arbitrary figure and may be less important. If the Bank of England does hit its 2 per cent inflation target, pensioners will still be protected. If inflation is much higher, a ‘double lock’ should still offer protection.
Most importantly pensioners need some certainty. I hope the government will soon clarify its position on future state pension payments as this is clearly a sensitive political issue and the constant threats to state pensioner support are undermining confidence across the economy, as well as adding to inter-generational tensions.
Ros Altmann is an independent pensions consultant
You said:
martyn_young752 in response to a story about the FCA adversely affecting confidence in financial institutions (FA 11 July).
“My view is that like the approved persons register has failed, so too do the fines. A much simpler way to penalise the large banks and institutions for their serious ‘misconduct’ would be to dramatically lower the fine and simply suspend their permissions on a temporary basis. Once they prove they have got their house in order, lift the suspension. Although some of the fines that have been dished out seem huge by way of the actual amount, it is tiny in comparison by the amount of time it takes these banks to trade in order to recoup the fine.”