Trying to Retire in a Man’s World

by Dr. Ros Altmann

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The UK state pension system is hopelessly old-fashioned, ludicrously complicated and in urgent need of radical reform.  Now is the time for bold moves, which will sweep away the outdated attitudes and unfairnesses which permeate the current National Insurance (NI) pension system.  There is a broad consensus, outside Government, calling for a much more generous first tier of state pension provision.  The current basic state pension (BSP) is far too low.  The fact that around half of our pensioners (heading for three-quarters in years to come) will have to depend on means-tested benefits, is unsustainable and is undermining private pensions by destroying incentives to save and rendering pensions an ‘unsuitable’ investment for the majority of basic rate taxpayers.

The NI pension system is based on contributions made while in the waged labour force.  This automatically penalises people who are not working in the waged labour market and those with low wages.  Thus, the section of society which is particularly vulnerable to low pensions is women. 

Our state pension system (dating back to the 1950’s) seems to have been designed, by men, for men, with wives who were expected to be totally dependent on their husband.  It penalises women who take career breaks, who work part-time to care for others, or who take time off to help their families.  Even when reforms have been introduced, to try to offer women ‘credits’ into the NI system for years spent out of the labour force, the protection of pension rights is far from adequate.  Petty rules and seemingly pointless exclusions are common in women’s pensions.  So, not only are they less likely to accrue occupational pensions (because they work less years and earn less money) women are also penalised by the state pension system too.  It is time women’s pensions were brought into the 21st Century, to recognise that women who are not working in the ordinary jobs market are still doing something socially useful, which should entitle them to full recognition in the state pension system.  A citizen’s pension, paid automatically at the pension credit level of around £110 a week, would at last offer fairness in our state system.

Let’s consider how women are penalised by the NI pension system rules. 

  1. PART-TIME AND LOW-PAID WORK:  Women bringing up children, generally work part-time.  Also, around a quarter of women aged 45-64 are carers, who usually work part-time.  However, anyone earning below the NI qualifying level (around £82pw) does not pay NI and accrues no state pension.  (Although the strange rules say that, if the job pays between £82 and £94 a week, no NI needs to be paid, but entitlement to state pension does accrue!)   However, having two part-time jobs, giving total income above the Lower Earnings Limit, but each one paying below £82,  accrues no pension at all.
  1. 10-YEAR RULE:  Unless contributions have been made for at least 25% of the number of years needed to qualify for the full BSP, no state pension is paid at all!  Therefore many women’s contributions for 9 years are wasted and deliver no state pension whatsoever.
  1. CARING YEARS NOT FULLY CREDITED:  Home Responsibility Protection (HRP), supposedly designed to give women NI credit for time spent caring - only applies to full tax years.  Taking off a full year, but from July to July, receives no HRP!  Taking time off to be with children every year, but only perhaps for school holidays, also accrues no protection at all.  HRP does not credit women fully, since it is related to contributions while in employment.  For example, a man working for 30 years is entitled to 70% BSP, but a woman working for 10 years with 20 years HRP may only accrue 50% BSP.
  1. TAX RELIEF:  Women are more likely to be lower rate taxpayers, so they get much less tax relief on any pension contributions they make.  We spend over £10billion a year on tax relief for pensions, but most of this goes to higher earning men.
  1. PENSION CREDIT:  The calculation of the savings credit element of pension credit assumes that claimants receive full BSP, before they can receive any savings credit at all.  Therefore, anyone without a full BSP receives no credit in the calculation of their entitlements.  Since only 31% of women aged 65-69 have a full BSP, (compared with 85% of men), many women are discriminated against even in the pension credit!  For example,  those receiving £20 less than full BSP, are no better off financially in retirement with a private pension worth under £20 a week.  Therefore, £20,000 saved in a private pension, buying an annuity for £20 a week would get no credit in the pension credit calculations.  This interaction of means-tested pension credit, with private savings, also works against women in other areas of private pensions.  Many employers and financial advisers are reluctant to encourage lower paid women to join an occupational pension scheme, and advisers are wary of selling pensions to many women, for fear of future possible claims of mis-selling, if the woman ends up losing all the pension in the means-test calculation (two-thirds of pension credit claimants are women).  Thus, women suffer both in the state system and in their private pensions too, as a result of the interference of state pensions with the ‘suitability’ of private pensions for the mass market.
  1. CONTRACTING-OUT OF STATE SECOND PENSION:  The recent FSA study on the poor value of contracting out showed that women lost out more than men, when they contracted-out into personal pensions.  This is partly because of the interrupted contributions, penalties and high charges that are involved in the personal pensions which women would be accruing.  But most women are unlikely to know how to decide whether to contract-out or not and advisers are unlikely to help them.
  1. ANNUITIES:  Women receive lower annuity rates than men, because they tend to live longer.  Most women would not buy an index-linked annuity, so the older they get, the poorer they get.  In addition, men who buy annuities (which will become increasingly common as occupational pensions move to defined contribution arrangements) tend to buy single life level annuities, often because they do not really understand how annuities work.  Without advice, men usually choose the highest initial income, without realising their wife will then get nothing from her husband’s private pension when he dies. 
  1. SINGLE WOMEN SUFFER:  At the moment, half of all women pensioners are single, with the older ones being the poorest.  Half of all marriages end in divorce and by 2020 it is expected that 40% of women aged 55-64 will not be married, without protection of a husband’s pension.  For men, divorce and having children  do not penalise their pensions, but for women these changes will almost always result in a lower pension later.  The State pension system relies on wives benefiting from a husband’s pension, with married women’s stamp, cuts in inherited SERPS and joint entitlements leaving divorced and single women very vulnerable to poverty.  Why should women’s State pensions depend on their husband?

It is clear from all this, surely, that women in our society get a raw deal when it comes to pension provision.  Of course, some of these issues affect men too. Men in part-time and lower paid jobs will accrue less pension, but they do not suffer from the same lifestyle factors as women.  Social norms do not require men to be the primary carers for children or other relatives, they are more likely to be in jobs with occupational pensions and are more likely to have complete work records.  If women in society are becoming more independent, both because of the changing nature of the job market and also because of the increasing number of women who are not married and  have no partner to rely on, then surely our state pension system should adjust to new realities.  Many women will inevitably lose out on private pensions, due to these lifestyle and social factors, but it seems grossly unjust to penalise their state pension rights as well. 

Government needs to accept that our NI pension system must be properly reformed.  Not further tinkering to add additional complications, but sweeping away the old rules and giving women pensions in their own right.  A citizen’s pension, ending pension credit means-testing penalties of private pensions and sweeping away the old impenetrable complexities, would finally free up the private pensions market to properly fulfil its role.  State pensions are for social welfare – and women should be entitled to the same welfare rights as men - but then private pensions should provide savings vehicles on top, for everyone to save safely for their future.  Advisers need to be able to offer pensions to everyone, without fear of mis-selling claims.  Tinkering with the current system cannot deliver this, but a citizen’s pension could.  The sooner we address this, the better.


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