Rolling in the years: Pensions are not for everyone
This week saw the latest attempt to solve the pensions crisis in the UK even if there are millions that should be avoiding joining a pension
As Ed Miliband steals Cameron’s clothes and Dave wonders how he is going to win over the restless crowd in his party next week, this week saw the launch of one of those great laws of unintended consequences – automatic enrolment into pension schemes.
With an ageing population, the pension problem is, and will be for some time, a major headache for governments of all colours.
Expenditure on state pensions will hit 8.47 percent of GDP in 2013 – that’s some £138.1bn compared with a defence expenditure of 2.23 percent of GDP at £46.3bn. For the record, health care costs £125.9bn while welfare is hitting £36.4bn.
The problem has been simply that millions of people already think that they pay into a pension already through National Insurance (NI).
Ever since the main Beveridge recommendation that this should actually be an insurance pot was rejected, governments have been using NI as an assurance scheme – that is, the money put in gets paid out.
Indeed, viewing it more harshly, you could argue that actually this is a glorified Ponzi scheme; you put your money in NI with the promise of monies to come down the line.
This wouldn’t be a problem if not for our ageing population.
By 2035 the number of people aged 85 and over is projected to be almost 2.5 times larger than in 2010, reaching 3.5million and accounting for 5 percent of the total population. And the population aged 65 and over will account for 23 percent of the total population in 2035.
Unfortunately, this is being met by a lowering working population that pays for this in NI with the proportion of the population aged between 16 and 64 due to fall from 65 percent to 59 percent.
So a combination of the NI sleight of hand – which saw millions of people simply not bothering to save for retirement – and the ageing population saw firstly the stakeholder scheme and, as of last Monday, auto-enrolment being introduced in an attempt to do something.
The concept is quite simple and a concept that most readers will be familiar with if you have ever entered a competition or filled out a form from a company.
At the bottom of most competition forms is usually a box that asks you to tick if you don’t want to hear from the company about offers and suchlike. The thinking behind it is that you must decide to say no, and actually take a decision. With auto-enrolment the concept is similar.
For the last 12 years companies have had to offer a pension to employees – the minimum being the stakeholder scheme – but the issue was that you had to actively join the scheme. People being lazy generally didn’t bother, so the thinking went, hence auto-enrolment is being introduced.
The theory dictates that very few people will actively opt-out of a pension scheme – people being happy to have the decision made for them. But, and it is a big but – in fact, a Jennifer Lopez-sized but – this could lead to an even bigger political issue when the first lot come to retirement.
Simply put, not all people should pay into a pension scheme.
The regulations as they stand say that if you are under state retirement age you have to opt out but what if you are 60, or 50? That 9.2m of the population? The money you put in will get you a pittance.
The scheme says that up to 2017 an initial 8 percent minimum will have to be paid in – 4 percent from your qualifying wages, 3 percent from your boss and 1 percent in government contribution through tax relief.
So, to use an example, you pay £40, the employer puts in £30 and the government essentially puts in £10.
Now, and bear in mind that there will be incremental increases in contributions which will see an extra 3 percent or so go in after 2018, if you are a 20 year old that unfortunately stays on £10,000 for the next 45 years, even at the base introductory rate you will get around £338 a month.
Not brilliant but better than a kick in the head.
But what if you retire in five years’ time?
Well for a 60 year old on £10,000 a year, they will be getting a grand total of around £19 a month.Yep, around £19 a month so forget those ideas of a grand retirement, maybe an extra round in a pub.
This amount is estimated on current tax and pension laws relating to defined contributions (DC) schemes but there appears to be no provision to people over, say 50, that this may not be the best way to use your money for an extra pot after retirement.
Granted, having an extra tenner or so a week if you entered at 50 may be a useful top-up, but there may be better ways of generating more income. Indeed, with rising bills, even taxed, the extra £40 a month may be more useful right now rather than ten years down the line.
And that is if your scheme performs well. Remember, in DC schemes it is your money and it is your risk. Unlike defined benefit schemes where the investment risk is carried by the sponsoring company, if your investment has a bad time – and five years for the 60 year old is far too short to smooth the bad times with the good unless something incredible happens on the market – there will be less money in the pot for you to buy an annuity.
And a company cannot tell you that you are the wrong age to benefit from investing in a pension – it’s illegal – so you may auto-enrole unwittingly and non-advised which could be a poor decision depending on your circumstances.
Now don’t get me wrong, I think that if your company offers a pension and you are young enough to benefit from a scheme then I think the government should be applauded for trying to do something about the pensioner income issue, but I worry that those who shouldn’t, will enter a pension scheme or will get sucked in every three years when enrolment kicks in again.
The problem is that the law of unintended consequences will politically hit the government when those, that could have used that extra cash in these hard times, find a pittance lining their pocket five years down the line.
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