Pensions are a real problem nowadays. The state pension is in trouble as a result of the falling birthrate coupled with increasing longevity, which means there are fewer and fewer young, working people to support more and more elderly people. PAYE pensions mean that anything you pay in now goes straight out to whoever is of pensionable age. When you retire, your pension will depend not on what you have paid in – which will be totally irrelevant – but on what the generation of workers at that time are paying in. ‘National Insurance’ is not based on any recognisable principles of insurance.
Occupational pensions are in trouble, as final-salary arrangements are becoming unsustainable, even in the public sector. The government has announced that, for 1.3 million workers in the NHS, pension age will rise from 60 to 65, and some workers will be offered average-salary pensions rather than final-salary.
Private pensions are in trouble, partly because of Gordon Brown’s raid on pension funds to pay for his own projects, which left them less robust than they would have been to withstand a falling investment market.
And as for saving if you are on a low income – forget it. The government’s pension credit makes it a complete waste of time and assets. You will be much better off if you just spend everything and then claim the Chancellor’s new benefit for the elderly, aimed specifically at those who have never given in to a thrifty instinct.
Which makes it all the more strange that the government launches today its child trust fund, which will open a savings account for every baby born, and put £250 into it, with a top-up at age seven. According to Stephen Timms, financial secretary to the treasury, the aim is to ‘boost the culture of saving… We want to make sure that every single young person has a worthwhile financial asset available to them at the age of 18’.
The only way in which these young people will have a ‘worthwhile financial asset’ at 18 will be if they get into the habit of saving themselves – but why would they do that, when all the signals sent out by the tax and benefits system encourage you to spend rather than save? If they leave the £250 gathering interest for 18 years, it will just about cover their eighteenth birthday celebrations, perhaps enabling them to take advantage of the government’s 24-hour drinking laws and big new casinos.
Comments (2)
It would seem to me that the only solution to providing a meaningful retirement pension is a combined compulsory saving and a government tax concession.
One only has to look at the spending habits of the majority of employed people today to realise that a compulsory contribution to a private (government monitored) pension plan would be no hardship.
I lived for 30 years in tiny Bermuda where the Bermuda government were faced with a similar problem of under-funding of the state pension scheme. Their response to this problem was quick and simple: the introduction of a compulsory, private pension contribution, funded equally by employer and employee. The contribution was fixed initially at a mere 1% each but rising over a short period to 5%. The intention is to replace the state pension although there would remain a government responsibility for those who fell through the cracks.
The situation in Bermuda is helped because there is no income tax and there would have to be a requirement in this country for the government to make such contributions tax free.
I would be interested to hear other comments about the praticality of introducing such measures into the UK.
Posted by Henry Kaye | January 12, 2005 9:30 AM
Posted on January 12, 2005 09:30
Apropos private pensions, you forgot to mention the cap on contributions placed by the labour gubmint in another burst of vengeful keening against the 'fat cats'.
At the age of 34 I was finally able to earn enough to think about a pension, but was told by a financial adviser that I would need to save 18% of my salary for a decent income at retirement - an impossibility, given that I was limited BY LAW to saving no more than 15% of my salary.
Since then, I have hied me to freer lands that are far, far away from dying old England...
Posted by John Galt | January 11, 2005 10:00 PM
Posted on January 11, 2005 22:00