Women's pension reform inadequacies

by Dr. Ros Altmann

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More spin than substance on women's pensions

The Government has recently announced changes which are designed to ensure that more people, particularly women, can retire with a full state pension. At the moment, only a third of women retire on a full state pension and the changes are supposed to mean that by 2010, 75% of women will have a full basic state pension on retirement. The changes do not just apply to women, but to anyone (such as men who stayed at home as carers, or ill and disabled people who could not work a full career). But of course, the majority of those without full NI records are women.

The new measures will allow people to buy more Class 3 voluntary NI contributions, to make up for missing years of their contribution record. Instead of only being allowed to buy back the last six years of missed contributions, the Government will let anyone retiring between April 2008 and 2015 buy back a further six years worth of missing contribution years - 12 extra years in total.

To qualify for the full state pension, women currently need 39 years of NI contributions and men need 44 years. From 2010 onwards, everyone will only need 30 years for a full contribution record. So the new proposals are designed to help more people achieve this full 30 year record.

This sounds like excellent news and, for some women, it will be, however the announcement seems to me to be rather more spin than substance. The complexity of our state pension system and the details in the small print mean that anyone thinking of buying back will need financial advice first and also that advisers need to be careful when assessing the benefits of the changes.

The DWP press release announcing the change stated: "This is fair, affordable and straightforward - and it will give more people the chance of a more secure future to look forward to in retirement". That did make me laugh. Nothing about our state pension system is 'straightforward' - it is the most complex in the world. Also, a full basic state pension is only £90 a week - hardly a 'secure future' in retirement!

My big fear is that many women will hear about these changes and just pay for the missing contribution years when they should not be doing so.

This is not a simple decision and the complexity of our system, coupled with the interaction of state pensions with means tested benefits, could result in many people wasting their money by buying extra years of pension entitlement.

The Government originally refused to extend the contribution buyback option, in particular because it feared that ex-pats might want to buy the extra years and that this would be a poor use of public money. In order to 'better target' the resources, it has been announced that only people who already have 20 years of NI contributions will be able to buy back the extra years. Therefore, women who worked part-time in low paying jobs earning below the NI earnings threshold may not have the 20 years they need to be able to buy more state pension. Or if they had two part-time jobs which both paid below the minimum NI limit, they again will not have accrued any entitlement and will not be able to benefit from the changes. This is yet another example of how our current system is still unfair to many women.

This big sting in the tale of this announcement, however, is that the Government is planning to increase the cost of buying the extra years. It has said that it wants the changes to be 'cost neutral'. At the moment, the Government charges around £420 for each year of contributions that is bought, so if someone needs an extra 10 years' worth of contributions they will have to pay over £4,000. During the House of Lords debate on these measures, it was announced that the Treasury plans to increase this charge by 50%.

Another disappointment is that none of these changes applies to past pensioners. Anyone who retired before April 2008 cannot buy extra state pension entitlement at all.

So the crucial point for the public to understand is that anyone considering buying extra years of NI should get advice first. Preferably from an independent financial adviser, but of course most lower income groups will not have access to an IFA, so if that is not possible then they may have to ask the Citizen's Advice Bureau or perhaps the Pensions Advisory Service National Helpline (0845 6012923).

The complexity of the UK pension system makes it very difficult to know whether this is actually a good deal for many people or not. Anyone who might qualify for the means-tested Pension Credit should probably not buy back missing years. Pension Credit pays a single person around £130 per week and is available to everyone over age 60, irrespective of their NI record. A full basic state pension is only around £90 a week, so people who have little or no savings or other income could claim pension credit and get far more than the full basic state pension anyway.

For higher income groups, with little or no risk of needing to claim pension credit and no husband's entitlement, it is probably a good deal, but even then most people may be better off waiting until just before retirement before making their decision, because then they will be in a better position to judge whether this is likely to be the right thing for them to do.

Anyone who is very ill and not expected to live long past age 60, would be unlikely to be best advised to spend money on buying extra years of NI. They would need to live about 5 years past pension age just to get their money back.

Another risk factor is that the Government could cut the state pension in future, which would alter the economics of the decision to buy extra years.

The bottom line here is that, while welcome for some people, these measures are just more tweaking of our hopelessly outdated state pension system. Yes, they will make some people better off but they won't solve the problem that our system still contains many unfairnesses associated with the qualification criteria and is impossible for people to understand. It is not fit for purpose and we need a radical rethink of how we support our elderly population.

The ludicrous complexity of our system allows minor changes to be portrayed as major concessions, but the truth is that we have the lowest and most complex state pension system in the developed world.

With an ageing population, change is essential. However, so far politicians have preferred to fiddle with our existing system than design one that is fit for the 21st century. A flat-rate citizen's pension for everyone over a particular age would finally sort out our problems and allow financial advisers to sell long-term savings products and pensions safely to everyone. When will we get it?


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