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.