Bridging the gap to pensions equality

Let us not forget the underlying good news here – on average we are living longer. The sting in the tail is that someone has to pay for that. With an ageing population, the government will be very conscious of the growing cost of state pensions, but cost-saving plans to remove the triple lock are now on the back burner.

The pay-as-you-go nature of the UK’s state pension means it is national insurance contributions from today’s workers that fund today’s state pensioners. So unless the state pension age is pegged to increases in life expectancy, pay-out periods will get longer and longer, placing an ever greater burden on those of working age.

For those clients who do not relish working into their 70s, the key message has to be to revisit the adequacy of private and workplace pensions to bridge the increasing gap before state pension kicks in.

Recent news concerning the Universities Superannuation Scheme’s record £17.5bn defined benefit scheme deficit also highlighted generational issues. One suggestion was that student tuition fees might be increased to fund the deficit. Defined benefit schemes have always involved cross-subsidies between generations, with a year’s extra accrual costing much more at 55 than at 25. But surely solving historic defined benefit deficits by saddling our future workforce with even greater student debt is a step too far – a case of robbing grandson Peter to support grandpa Paul’s pension.

Advisers will be only too aware of the huge challenge we face in encouraging younger generations joining the workforce to take pensions seriously. Substantial student debt with high-interest repayment rates and an increasingly daunting task of getting on the property ladder are just some of the challenges older generations did not have to face.

We need to get the message over that, despite the temptations, opting out of an employer’s pension scheme is not the right answer. Giving up employer contributions is turning down free money. Contributions paid in the early years have most to gain from investment growth, so opting out is doubly damaging for younger generations.

Intergenerational fairness will be a key factor in the promised government consultation on social care funding. As we live longer, more of us will need some form of social care in later life, but who should pay? I believe we need a clear, sustainable deal between the state and individuals, which is accepted as being fair between wealth bands and generations.

I also believe an overall cap on personal contributions is essential. This could open up a major new area for advisers to help clients plan ahead to meet potential care costs while protecting inheritance.

Key points

• Equality and fairness on pay and pensions should be at the heart of future government policies. 
• Pension freedoms give people the ability to draw income to cover care costs. 
• Stamp duty remains an important issue for those at both ends of the age spectrum.

There are those who advocate planning for social care costs through some form of protection policy or through a new form of standalone care Isa. However, we already have a solution, at least for those with defined contribution pensions. Pension freedoms gives people the ability to choose how and when to draw income.

It also allows people to notionally ring-fence a part of their pension to be used should they need social care, without facing penal tax on the remaining funds on death. Recent research found that more than half of those surveyed would be interested in using a solution to fund long-term care in advance. It also found 43 per cent of people were in favour of using their pension to fund social care costs. This is a solution that would not only combine social care considerations with retirement planning, but also increase the need for advice.

Thinking more holistically, the government could also take active steps to reduce pressure points across the generations by developing more joined-up housing and retirement policy. With intergenerational fairness a buzzword at this year’s Conservative Party conference, it was no surprise to see the prime minister extending the government’s Help-to-Buy scheme in support of aspiring home owners.

But it is clear that more can, and should, be done to help ease pressure across the generations. Stamp duty remains a big issue for those at both ends of the age spectrum. Not only is it yet another barrier for first-time buyers to get on the housing ladder, it acts as a financial disincentive to those within the older generation looking to downsize. This group is often under-occupying, so moving to a smaller property would not only free up family homes to those in greater need, it could also free up funds for property-rich, pension-poor older generations to fund an increasingly longer and more costly retirement.

With a fragile parliamentary majority it would be easy for the chancellor to be timid in the November budget, but there is an opportunity to be both bold and transformative.

Every generation faces its own challenges, financial and otherwise, and these have changed dramatically. Figures show those who have retired in recent years have almost caught up with the incomes after housing costs of those of working age, largely because of generous defined benefit schemes and more affordable property purchases. But younger generations in defined contribution schemes need to be helped to understand that they are less likely to enjoy the same retirements as today’s golden age of retirees.

Agreeing on the best approach to intergenerational fairness will not be simple, but it need not lead to a battle of us versus them. Most younger people want to see older generations have a dignified retirement, and parents and grandparents want to see future generations have the best start in life they can, without being crippled by financial burdens.

The state will always play a central role, but whatever your gender or age, it is increasingly clear there is a need to make personal provision for the future. The need for financial advice can only increase.

Steven Cameron is pensions director at Aegon UK