Speaking at FTAdviser’s Retirement Freedoms Forum yesterday (24 September), Mr Lewis described the state pension as a “true fire and forget product”.
He said: “We have no choice – we are in it. And I mention it because it is widely misunderstood. Even by some financial advisers.”
From April there will be a new higher flat-rate pension for everyone who reaches pension age from April 2016. The exact amount of the new pension will be announced later this year but it will be at least £151.25 a week or £7,865 a year.
Ministers had given the impression that everyone with 35 years’ contributions – increased from 30 – who reaches state pension age from 6 April 2016 will get the new pension, however it has now emerged most of those reaching pension age that first year will get the same as they would have got under the old system.
In the first year of the new pension, from 2016 to 2017, Mr Lewis claimed 63 per cent of new state pensioners will get less than the full new state pension and for women the position was even worse as only 20,000 will qualify in the first year.
Even from 2016 to 2020, Mr Lewis claimed that only 45 per cent of those reaching pension age will get the full new pension.
He said: “I doubt if any two people retiring in the first year will get the same amount. Flat-rate it is not.
“But for many of them the new state pension will be the foundation of their income. The full pension will be at least £7,865 a year. And don’t sniff at that. It is more than index-linked.
“If you wanted to buy an annuity to give you £7,865 a year index-linked at age 65 in this postcode here in Edinburgh it would cost you £220,000 with the best provider and £272,000 with the worst.
“I mentioned the Rolls Royce final salary scheme earlier. But with the full state pension worth a quarter of a million pounds - that it is the Lamborghini pension.”
His comments came after last week pensions minister Ros Altmann has unveiled an advertising campaign explaining the new state pension, set to be introduced in April next year, whilst admitting that previous efforts to explain the shake-up left something to be desired.
Under the tagline “Our state pension is changing”, the campaign aims to broaden the public’s understanding of how the new state pension will work and how it affects them, based on their own national insurance record.
On auto-enrolment, Mr Lewis was not complimetary, describing the scheme as “very basic”.
Around 5m workers have been put in auto-enrolment to the end of August, with about one in 10 opting out, Mr Lewis noted, but he declared the success of auto-enrolment was due to“inertia rather than enthusiasm”.
Like other industry commentators, Mr Lewis flagged up that the auto-enrolment pension contribution target of 8 per cent by 2018 is still insufficient for a decent retirement.
He also said that, due to the 8 per cent being of ‘band of earnings’ and not on whole pay, the most that can be paid in is 6.9 per cent of total pay and that is for people at the level where higher rate tax is paid - £42,385 this year.
“Auto-enrolment is pensions on the cheap. And the next generation of pensioners will be living on very small pensions – much worse than many of those paid to today’s pensioners. “
emma.hughes@ft.com
