Professional Pensions column on urgent post-election pension reforms

by Dr. Ros Altmann

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It is vital that the State pension system is reformed urgently and radically. State pensions are so low that half our pensioners need means-tested pension credit to avoid poverty. But this penalises private pensions by at least 40%, makings pensions 'unsuitable' for huge sections of the population. This is a vicious circle, undermining private provision and preventing tomorrow's older people from contributing to ensure they do not fall into the means-testing trap themselves.

A higher, universal state pension, of £110 per week (pension credit guarantee level), would end pensioner poverty and the disincentives of means-testing. It would cost £7bn a year, which could easily be afforded with £11 billion saved by ending contracting-out. The state pension would be flat-rate only, not earnings-related. Just because people earned more when they were working, why should the Government pay them more when they are not working? There should be a clear division between state and private provision.

Once the state system no longer penalises private pensions, there would be a clear message for individuals. The state will provide £110 a week, which is enough to live on, but only just. If you want life's little luxuries, you will need more. Saving will give you a chance of a better lifestyle in retirement.

Initially, we will also need to encourage people to believe in pensions again. An essential first measure for this is to properly compensate all the victims of employer scheme wind-ups, who trusted in pensions and have lost out so badly. Then better incentives for pension contributions should be considered. Using tax relief is unfair - giving most incentive to those who need least! Matching payments, providing the same level of incentive for the same contributions, would be fairer.

To sum up then, first we need to reform state pensions, with a universal citizen's pension of £110 per week, no contracting out and no state earnings-related pensions. Then we should improve incentives for private pension contributions using matching payments, rather than tax relief. We would not need compulsion, but auto-enrolment would be helpful. Individuals should be left to choose how to finance their income in later life. Do they want to just live on the state minimum, save more for themselves, or continue working longer?

Which leads to the final piece of the pension reform puzzle. Pensions are being forced to last too long and this is unsustainable. We need to re-think 'retirement, encouraging gradual, flexible withdrawal from the labour force. Part-time working at older ages will be better for individuals and for the whole economy. Pensions could supplement income, rather than being a total replacement, making them more affordable. With these reforms, we would truly have a 21st century pension environment, that will be sustainable and adaptable going forward.

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