Many earners face paying
excessive national insurance contributions to fund Labour’s shake-up. And millions of middle-class
taxpayers will end up paying for Labour’s plans to
boost pensions.
John Hutton, the work and pensions secretary, revealed the
long-awaited proposals for the overhaul of Britain’s
pension system in a white paper on Thursday. The government
has accepted most of the proposals suggested by Lord Turner’s
Pensions Commission.
The state pension will rise in line with earnings from 2012
at the earliest, although we will have to work longer in
return, and millions of workers who are not currently saving
into a company pension will automatically be enrolled into
a national pension savings scheme with compulsory employer
contributions. But while the plans were welcomed by consumer
groups and the pensions industry, there are fears middle-income
families will end up shouldering the cost of the reforms.
Labour insists its proposals will not require large tax
rises because it will be able to meet the costs by increasing
the state pension age. However, Matthew Wakefield of the
Institute for Fiscal Studies said: “Despite the planned
increase in the state pension age, increased borrowing or
taxation is expected to be required to finance these proposals.”
The conservatives have pointed out there is already a stealth
tax on the middle classes hidden in the proposals. Under
the plans, an increasing number of people will pay national
insurance contributions (Nics) for which they will receive
no pension benefit in return.
The key change relates to the state second pension (S2P),
a top-up to the basic state pension formerly known as Serps.
At present the amount you receive from S2P is linked to earnings,
so the more you earn the more you receive, up to a limit.
But the government wants to put a cap on S2P so that by
2030 everyone will receive the same amount. Many people will
see the amount of S2P they receive plunge in value without
enjoying an equivalent reduction in Nics. A higher-rate taxpayer
will in effect be overpaying by £2,119 a year.
Pensions experts are also concerned that
the reforms could leave millions of people in generous company
schemes worse off in retirement.
At present, firms pay an
average of 6% of salaries into money purchase schemes and
even more into final-salary plans. They will have to pay
only 3% into the national pension scheme, however, and
there are fears existing plans will downgrade to that level.
The proposals could be watered down before they become law,
however. The reforms won’t be introduced for at least
four years, leaving plenty of time for government tinkering.
Assuming they go ahead, we explain how the measures will
affect you.
What does it mean for my state pension?
The government wants to reintroduce the link between the
state pension and earnings, which was severed by Margaret
Thatcher in 1980.
The state pension currently rises in line with inflation.
Because incomes usually rise faster than prices, this means
it will become more generous in future. The government estimates
that by 2050 it will result in a total state pension at retirement,
including the S2P, of nearly £135 a week into today’s
terms. If it were to remain linked to prices, it would be
worth between £90 and £100 a week. Ministers
said the increase in the basic state pension will lift more
of us out of the means-tested net. Under the current system
about half of all pensioners are subject to means-testing.
By 2050 that will fall to a third.
But the restoration of the link to earnings will not take
place for many years, meaning it will do nothing to help
those who have already retired.
The government hopes to introduce it by 2012, but the date
may be pushed back, to 2015 at the latest. In the meantime,
pensioners’ incomes compared with those of the working
population will continue to fall.
When will I get my state pension?
The government says there is a trade-off if we want a bigger
state pension – we will have to work longer. The age
at which men and women qualify for the state pension will
go up from 65 to 66 from 2024, to 67 from 2034 and 68 from
2044.
People who are now in their twenties will have to work until
they are 68 before they collect their state pension. Workers
in their thirties will be able to retire at 67 and those
under 47 will have to work until 66. Workers aged 47 or over
are unaffected.
The state pension age for woman is already due to rise from
60 to 65 between 2010 and 2020.
But there will be nothing to stop you retiring earlier if
you have alternative means. At present, you can take benefits
from a private pension at 50. From 2010 that will rise to
55.
What’s in the proposals for
woman and carers?
Under the current rules only one in three woman is entitled
to a full basic state pension, compared with 85% of men.
The amount of state pension you get is based on average
Nics over your working life. Taking time off to care for
children or relatives eats into that average. The government
wants to make it easier for woman and carers to build up
a decent pension, so from 2010 it will reduce the number
of years needed to qualify for the full basic state pension
to 30 years. At present woman need to work for 39 years and
men 44.
Ministers said that when the changes are introduced after
2010, seven out of ten women will become entitled to a full
basic state pension. However, millions of woman aged 57 or
over will not benefit.
Will I lose out from the reform of the state pension?
About 20m people pay into S2P, formerly known as Serps.
It pays a top-up according to your income and the number
of years you have worked and paid Nics.
Someone with a full employment record earning £33,000
or more a year receives up to £110 a week. But the
government wants to turn S2P into a flat-rate payment worth
about £60 in today’s terms by 2030. Insurer Aegon
estimates that anyone earning £18,000 or more will
see the amount of S2P they get slashed.
Millions of people have opted out of the
state second pension to make their own provision, either
through a company pension or a personal plan. They get a
rebate of their Nics that is paid directly to their pension
company. But from 2012 individuals in money-purchase company
schemes will be forced back into the state scheme. However,
they will not be forced to pay back any rebates they have
already received. Members of final-salary schemes will still
be able to opt out.
My company does not pay into a pension
on my behalf. Will that change?
From 2012 everybody in a job who is not already in a company
pension plan will be automatically enrolled in the national
scheme from the age of 22, with the right to opt out.
If you stayed in you would have to contribute a minimum
of 4% of your post-tax earnings between £5,000 and £33,000
a year – about £93 a month if you are earning £33,000
or more. The government will contribute tax relief of 1%
while your employer will have to pay another 3% - a total
of 8%, or about £187 a month.
Contributions are expected to be collected through payroll
and, along with the employer’s contribution, transferred
into your own individual pension pot, which could move with
you if you change jobs. You will also be able to make additional
contributions. However, the government is vague about the
details of how it will work.
So will an 8% contribution be sufficient to leave me better
off in retirement?
Almost certainly not. Many people aim to retire on about
two-thirds of their salary. To achieve that, people on average
earnings and their employers would have to make total contributions
of about 16%.
Where will the money paid into the national plan be invested?
Labour hasn’t made this clear but it is likely your
money will be invested with an insurance company or fund
manager.
I already have a company pension scheme. How will the national
plan affect me?
If your company already offers a pension scheme and it’s
contributions are 3% or more it will not have to offer the
national scheme.
If its contributions are less than 3% it
will have to raise them to this level or offer the national
plan as well. Most .
However, some commentators fear firms will
bcontributions made to company schemes are in excess of the
minimume tempted to
close their plans and fall back on the national scheme to
cut costs.
Standard Life, the insurer, estimates that if all employers
cut back contributions to just 3%, workers will be £14
billion to £15 billion worse off in retirement.
|
Back 
