Will your pension be hit on Osborne's route 66?

Published on Saturday 10 October 2009 15:08

SHADOW chancellor George Osborne promised to be straight with the public when he announced a raft of measures, aimed at tackling government debt, which the Conservatives would introduce if they win the election expected next year.

These included a public sector pay freeze, raising the state pension age to 66, cutting tax credits for the better off and scrapping the child trust fund. The Tories have also pledged to support marriage through the tax system.

But these simple announcements will have far-reaching implications for the personal finances of millions of families. Over the weeks to come, voters will demand more information about how precisely their pockets will be hit. Planning arrangements, from pensions to saving for children's education, may have to be unravelled. Here Scotland on Sunday attempts to answer key questions:

PENSIONS

Q: Will everyone have to work until they reach 66?

A: That depends on each person's age, sex and the outcome of a review which the Conservative party has pledged to instigate. As their proposals stand, essentially men who are currently aged between 51 and 58 would have been heading for a state pension at 65, but may now be required to wait for another year. Although women have been given some leeway, on the grounds that they are already having to accept retiring at 65 rather than 60, some women will still be hit. Those currently aged above 54 will continue to retire at 65, but those aged between 51 and 54 can expect a phasing in of another year in work, so might have to wait until they are 65 and so many months for their state pension.

Q: How much will people lose?

A: The basic state pension is currently 95.25 a week for a single person or 152.30 a week for a married couple, where the woman does not have pension entitlement in her own right. In today's money, people will need to save an extra 5,000 to plug the gap which will be left by the state pension for a single year. So the figure will be higher, nearer 6,000, for those retiring between 2016 and 2020.

But that is if the only state pension they are relying on is the basic pension. If they are also due some top-up pension from the state, waiting an extra year for this might mean they lose a further 3,000 to 8,000.

Q: What happens if an employer insists an employee retires at 65?

A: The default retirement age of 65 is up for review again next year, and the expectation is that this would increase to at least 66 as well, which would prevent companies from forcing staff to retire earlier.

Q: So are people having to work longer to pay for the irresponsibility and stupidity of millionaire bankers?

A: Yes and no. Pensions will be bigger in future because they will rise in line with earnings rather than prices, so will climb much faster and maintain their buying power. It is worth remembering we have among the poorest state pensions in the developed world. Their value has been cut further since Margaret Thatcher ended the link with earnings in 1980. Had this not been done, today's pensioners would be getting more than 50 a week extra.

Osborne wants to restore the link, which is an ambitious pledge given the state of Britain's finances, and implied that waiting an extra year is the price we have to pay for that higher state pension.

But this is not strictly true. Linking pensions to earnings rather than prices was already in the pipeline, and crucially had already been budgeted for by exploiting the savings arising by increasing women's state pension age from 60 to 65, and also by limiting the state earnings-linked top-up.

So it is, indeed, the need to save money following the bail-out of the banks which has triggered this latest proposal, and will force thousands to wait a further year for their state pension benefits.

Q: If the state pension is going to be bigger, how much will it go up to?

A: That depends on when the link to earnings is established. The Pensions Act requires it to be earnings inflated by between 2012 and 2015. The expectation is that the link will be pushed back as far as possible. The longer it is uprated in line with prices rather than earnings, its buying power is falling, because earnings normally rise faster than prices. At the moment we are in a period of relatively benign inflation, but some commentators predict that it will pick up as a result of the government's fiscal stimulus. If this happens before 2015, the pension which is finally linked to wages may be worth far less than it is even today.

Q: What happens if someone can't go on working? Will they have to rely on jobseekers' allowance?

A: As arrangements currently stand, they could rely on Pension Credit, which is available to those aged over 60. This guarantees everyone an income of 130 a week. So they could claim this provided their earnings are below this level and they have savings of less than 10,000. However, in the new age of austerity, it might not be wise to place too much reliance on any individual state benefit when making retirement plans.

Q: What happens to the earnings-linked top-up pension which many people have paid into all their lives?

A: That depends. If they are expecting the state to pay either a Serps (state earnings related pension) or S2P, the flat-rate state top-up, then, if they fall into the age group affected, they will have to wait until they are 66 for that too. However, if they have contracted out either through a personal or company pension they may be able to access that part of their retirement fund earlier. A company pension will pay this amount at the normal retirement age, while personal pension holders can release this money at 55.

In another anomaly, public sector workers are paid their top-up state pensions as part of their occupational pension, so will receive this at their normal pension age, which is usually 65, 60 or lower in some cases.

Q: How will this affect company pensions?

A: If people have a final salary pension then they have a fixed retirement age, and their benefits to date have been accrued on that basis. In other words they should still be able to take them at 65.

However, many schemes may seek to increase their company pension age to 66, which could alter the rate at which they build up pension in the future. They cannot change the age for past service, but they can from here on in. People may not be able to access this part of their pension until they are 66.

Schemes may differ in their approach to pushing back retirement ages. Currently, many schemes pay a two-thirds pension in return for 40 years' service. Some pay this without taking the state pension into account, while others deduct the state pension.

Others again pay a two-thirds of salary pension until the date at which state pension kicks in, and then they deduct it.

Employees where the company has never deducted the state pension will not be badly hit, although they will lose the pension for a year. Those where the company pays two-thirds of salary less the state pension will have a gap. Companies which pay the state pension until it kicks in from the government may have to rely on their pension scheme to pick up the shortfall, which will increase pressure on scheme funding. Staff in money purchase or defined contribution schemes will get an extra year at work to increase their pension investment if they wish to remain in the workforce. Alternatively they can cash in their pension whenever they wish. However, they will have to make additional savings to plug the gap left by the state

Q: Will everyone be able to go on working?

A: That depends on the recovery in the economy. Currently only four out of 100 men work full-time at the age of 65 or over, while a third under 64 have retired or are working part-time.

Q: Is everyone living longer?

A: According to the latest data, men around 65 can expect to live about another 17 years and women nearly 20. Life expectancy in Scotland is about a year behind England's. In poor areas of big cities, not least Glasgow, people are lucky to reach 66.

What's Behind Cutting Comments

MOST taxpayers are bracing themselves for the government devouring more of their earnings, whoever wins the next election, but it is still anyone's guess where the axe will fall.

Conservative leader David Cameron said a Tory government would support the family through the tax system by making work pay, ending the couple's penalty in the benefits and tax-credit system, and rewarding marriage. But he gave no details on how that would be achieved against a background of the worst public finances since the Second World War.

Value added tax (VAT) was not mentioned by the Conservatives. But they stated that they would prefer to deal with the deficit by cutting spending rather than increasing taxes. Many believe whoever forms the next government will be forced to increase VAT to 20 per cent or even 22 per cent.

The Conservatives pledged to maintain child benefit, a move welcomed by the Child Poverty Action Group. "We are particularly pleased at the pledge to safeguard child benefit, which reaches more poor families than complex and stigmatising means-tested support.

"The decision to retain it shows that the Conservatives are serious when they say they want to simplify a complex benefit system."

Those on incapacity benefit, though, may be forced back into work as part of Conservative welfare reforms. And public sector employees earning more than 18,000 face a wage freeze.

There are some things we do know on the tax front. For example, from April 2011, employees will lose a further 0.5 per cent of salary from their pay packets when National Insurance increases. Shadow chancellor George Osborne indicated he would like to reverse this hike, but made no promises. Similarly, from next April, those earning 150,000 will see their marginal tax rate rise to 50 per cent and a clawback on their personal allowance which will also hit those who earn more than 100,000 a year.

Osborne has said he is not in favour of high taxes, but has not given any indication of when or whether the highest rate will be cut again.

He has warned that families earning more than 50,000 will lose their tax credits. He also announced the cessation of all payments into Child Trust Funds (CTFs) except for children from the poorest families. Those who already have child trust funds will keep them.

But critics accused the Conservatives of damaging financial education and children's prospects with the plan.

Victoria Nye, director of education at the Investment Management Association, said: "CTFs are an ideal hook to encourage children to learn the importance of saving money. Cutting CTFs would undermine the value of financial education lessons in schools and could potentially halt further progress in promoting a savings culture among young people."

David White, chief executive of The Children's Mutual, said: "We're surprised and disappointed by Mr Osborne's statement. If it is the intention to create a savings culture in this country we must preserve Child Trust Funds for all families."

And John Reeve, chief executive of Family Investments, added: "It is disappointing that in the understandable desire to cut government expenditure we may end up losing a scheme which has the potential to make a difference to young people's future.

"Child Trust Funds were designed to provide all children with a financial asset when they turned 18 which would provide them with a real head start in life."