Article for Daily Express on Pension Reform Proposals
by Dr. Ros Altmann
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UK pensions are in jeopardy and the State pension system urgently requires radical reform. UK state pensions are the lowest of all major countries, which has forced Government to introduce the means-tested pension credit, to take pensioners out of poverty. But increased means-testing introduces major disincentives to pension contributions. On retirement, private pension income is penalised by claiming pension credit (which over 75% of future pensioners will be entitled to). Each £1 of private pension is reduced by at least 40p when calculating State benefits. For basic rate taxpayers, locking money away in a pension and potentially suffering this 40% penalty just doesn’t make sense.
The most obvious reform is to provide a much higher level of State pension, linked to earnings, rather than price inflation. Older people living in the UK for over, say, 30 years should automatically get at least £105 a week, taking them out of poverty. This could be funded by stopping the annual £11billion payments of National Insurance rebates, which go to private pensions to encourage people to leave the state pension system. This ‘contracting out’ should be abolished, giving a clear distinction between flat-rate state pensions and private provision. Government should not provide earnings-related pensions. If people earned more when working, why should this mean the State pays them more in retirement to? This reform would mean that private savings designed to supplement the pension provided by the state, would not be penalised by means testing. Also, compulsion (beyond what we already have in National Insurance) would not be needed, and the requirement to buy annuities could be abolished.
New incentives to encourage pension contributions are long overdue. We spend £10 billion a year on tax relief for pensions, over half of which goes to the top 10% of taxpayers, giving most incentive to people who need it least! Government gives higher rate taxpayers £2 for every £3 they contribute to their pensions, whereas basic rate taxpayers only receive 85p for every £3 they contribute. Everyone should receive the same incentive, £2 for every £3 contributed.
Finally, we must recognise that we are living much longer, healthier lives and pensions can’t provide for this alone. Pensions were designed to last perhaps 10 years, which is fine, but they can’t pay decent amounts for 20, 30 or even 40 years. We have a working life crisis, as much as a pensions crisis. There’s a whole new phase of life waiting to be grasped, which previous generations never envisaged. Rather than wasting resources paying people not to work for decades, it’s much better for individuals, for the economy and society to enable older people to stay economically active, although part-time, rather than full-time. Gradually reducing work, still earning, but having more leisure when older, is much healthier, rather than suddenly stopping work altogether. Just saving more will not solve all the problems, but combined with more part-time work in later life, such changes could make pensions affordable again and ensure better long-term growth prospects for us all.