Plunging pensions mean a poorer future for millions
MILLIONS of workers' dreams of a more comfortable retirement are set to be shattered, with a new report unveiling the true scale of government plans to cut state pension payments.
State pension benefits have been drastically hacked back over the past seven years - and are set to plummet further.
The changes mean that people retiring in 20 years' time could be receiving up to 4,000 less in government pension payments compared with those who retired just a few years ago.
Pensions experts, unions and consumer groups hit out at the changes which will affect workers entitled to a second state pension (S2P), which used to be known as SERPS.
The move comes amid rising concerns over a "pensions crisis" in Britain with firms closing generous final salary schemes and experts warning that millions of Britons are not saving enough for their retirement.
Millions of workers earning between 5,000 and 35,000 are entitled to S2P, which ensures that they will get an earnings related pension when they retire in addition to the basic state pension of about 5,000 a year.
But the new government plans, revealed in a graph buried within the annex of the latest consultation document from the Government Actuary Department (GAD), will force people to work for longer for a lower payout.
The difference is stark: a worker earning 35,000 who retired in 1998 only needed to pay into the government scheme for 20 years to get an S2P of 7,500 a year.
Someone retiring in 2028 will need to pay into the scheme for up to 49 years to secure a second state pension equivalent to just 6,000 a year in today's money.
Those on an average salary would also get 1,000 less.
The situation for women who take time out of work to raise a family is even worse: by 2028, women who build up benefits over 15 years, for example, after taking time off to bringing up children will have witnessed a 67 per cent decline in pension benefits.
That means a woman earning 35,000 will receive just 1,836 per year in S2P in 2028, compared with the 5,625 dished out in 1998.
The Trades Union Congress said it was concerned by the figures. "It's a very worrying trend," said pensions officer Michelle Lewis.
"This is going to cause more damage to people's confidence in the pension system."
Charles Mullins, the managing director of Edinburgh-based Pensions Partnership branded the government's approach to pensions "farcical".
"It lurches from one failure to another without any reasoned attempt to address the fundamental problems of pensions," he said. "Why has it taken the government so long to realise that the cost of state pension benefits is going up because we're all living longer?"
Set up in 1978, the additional state pension benefit aims to boost the retirement income of those on middle incomes.
The new government graph shows the rate at which S2P benefits are accrued by workers.
While those retiring in 1998 clocked up benefits at a rate of 1.25 per cent of their "relevant earnings" per year, the graph showed that people retiring in 2028 will build it up at just 0.4 per cent per year - a drop of 68 per cent.
"This graph is astonishing because it exposes, for the first time, the full extent of the reduction in state pension benefits," said David Trenner, a technical director at Glasgow-based Intelligent Pensions.
He said he was "almost certain" that National Insurance contributions - which go towards S2P - would not be cut by the government to reflect the fall in benefits.
The National Association of Pension Funds claimed the report supported its calls to scrap the current state pensions system in favour of a flat-rate citizen's pension.
"Figures like this highlight just what a poor state of health the second state pension is in: there's no prospect of it recovering," said a spokesman.
"It's one of the most complex parts of the world's most complicated pension system and the simple answer is to get rid of it."
The consumer group Which?, meanwhile, was unsurprised: "It's a sad truth that the state has never ensured we're in good comfort and it's certainly not going to in the future," said senior researcher Nick Kirby.
"For a long time, it's been trying to shift the burden on to private pension provision."
The mounting concerns over state pension payments come amid warnings of an impending pensions crisis.
Life expectancy has surged, meaning that many consumers can expect a longer retirement.
But, with meagre state pension benefits and a reluctance to save in private pensions - the UK has an estimated 27 billion annual savings gap - the fear is that most people are facing an impoverished old age.
Those who have contracted out S2P, opting for the government to contribute to their private pensions instead, could be billions of pounds worse off, according to recent reports.
And pensions woes have been exacerbated by poor investment returns of late, that have hit pensions pots.
Some investors squirrelling funds away have also seen their dreams of a rosy retirement shattered.
Those with with-profits personal pensions are today almost 38 per cent worse off than those who retired three years ago, despite the stock market rally.
In July 2002, a man retiring at aged 65, having contributed to a with-profits personal pension for 20 years, would have accumulated an average fund worth 98,450. However, the same man retiring today, after paying identical premiums, would be left with a typical payout of just 61,578 - 37.5 per cent less.
The study, by Investment, Life & Pensions Moneyfacts, found longer-term payouts had continued to slide "alarmingly" in the past year.
And, despite being viewed as a cautious alternative to equity funds, many with-profits pension funds fail to show a profit after five years.
"The twin problems of low bonuses and reduced equity exposure are continuing to hamper performance," said the study editor, Richard Eagling.
A spokesman for the Department for Pensions declined to comment on the GAD report.
Search for a job
Search for a car
Search for a house
Weather for Edinburgh
Thursday 20 June 2013
Temperature: 11 C to 19 C
Wind Speed: 7 mph
Wind direction: North
Temperature: 11 C to 18 C
Wind Speed: 13 mph
Wind direction: West