Scrutineer: Radical rethink needed to restore ravaged pension pots

Published on Sunday 19 April 2009 20:55

FEW groups will be paying closer attention to the Budget this week than pensioners and in particular those reliant on lifetime savings to help see them through retirement in a modicum of comfort.

For it is this group – running to millions of people – who have been savaged by the financial crisis, the slump in the stock market and the slashing of interest rates on instant access accounts to near-zero levels. Almost everyone saving for retirement through a contributory pension scheme is in for a shock when the latest pension fund statements arrive in the post over the summer.

The UK stock market has fallen by 40 per cent from its recent peak in late 2007 and few pension pots have escaped a mauling. Many pension plans were heavily invested in bank and financial shares. Values here have fallen by 80 per cent and more.

So, even before those approaching retirement age prepare for the Russian roulette that is the annuity option, many will find their pension savings lower than five years ago – and that's despite the flow of monthly contributions.

More than six million rely on their savings to provide them with some of their retirement income, including 144,000 who take half their income from savings interest. So they are reeling from a double blow: sharply reduced lump sum values and – for those who understandably wish to take no more risks with their money – record low rates of interest on their bank savings accounts.

Millions of pensioners have seen their monthly income fall by almost 25 per cent over the past 12 months as interest rates have been slashed. According to figures from Ship (Safe Home Income Plans), the average pensioner a year ago this month would have been enjoying a monthly return of 158 from savings if the capital was kept in an easy access base rate tracker account. This would be in addition to the monthly state pension of 393, and it accounted for 28.6 per cent of their overall income.

However, as base rate has fallen, so has the amount of income the over-65s can derive from their savings and the modest monthly increase in the state pension over the period (20 for singles and 31 for couples) has done little to address this problem. Since April last year, single pensioners have seen their savings income dwindle to just 16 per month (4 per cent of income) and pensioner couples have seen it fall to 32 (5 per cent of income).

Even if pensioners have put their money in higher interest paying products such as fixed-rate bonds, they will still be suffering. Rates here currently average 2.78 per cent, so pensioners would be getting interest of 87 a month. This is still a sharp fall on a year ago, when fixed-rate bonds averaged 6.4 per cent, so the extent of the cuts is roughly the same.

But there is a further source of pain – the effects of means-testing and the impact of the tax and benefits system on income from pension savings which, perversely, is set to leave many no better off than had they not saved at all.

As Steve Bee, pensions guru at Royal Life (part of Scottish Life) points out, anyone who ends up in receipt of means-tested handouts in retirement will see the value of their pension savings reduced by at least 40 per cent and in some cases could even lose the whole value of their pension savings altogether.

Thus, while saving in a private pension could mean that someone's pension would increase, for some people overall income may not because of the interaction with income-related benefits, such as pension credit, housing benefit and council tax benefit.

As a result, ministers expect the take-up of additional Class 3 National Insurance contributions to be just 20 per cent. Thus, says Bee, "even though people's pensions would increase, they wouldn't be one penny better off as a result. So the expectation of the number who will take up the offer of paying more to increase their pensions is relatively low.

"I can understand that. What I can't understand, though, is why there aren't similarly low expectations of the number of people who will take up voluntary pension saving after 2012 once the new pension laws kick in."

Quite. Whether the new pensions regime will now be unfolded according to this timetable is moot. After falls of the magnitude experienced over the past 18 months, many are sighing with relief that they ignored official advice over the past few years and chose not to start saving through a regular pension plan at all.

Punter Southall is calling for a rethink of the timetable for introducing personal accounts in 2012. I suspect we will need something far more radical – a restatement of the right to claim tax credits on dividends which Gordon Brown took away in his first Budget, and far bigger tax breaks for savers.