Why pension changes mean you should start saving now

By Chris Torney

Daily Express personal finance editor and Confused.com writer, says why you should start saving for a pension now.

Big changes to pensions are afoot. The government has just announced its intention to proceed with plans to pay a universal state pension, possibly of £140 a week.

Almost simultaneously, Lord Hutton published his report into pensions in the public sector, recommending that the likes of policemen and teachers should not only retire later, but also contribute more of their salaries towards funding their pensions.

Clearly, public sector workers are unlikely to be happy with Hutton’s proposals – and ministers face a bitter struggle with the unions if they attempt to impose these reforms.

But the plans make sense to anyone who understands how rising life expectancy has added hugely to the cost of guaranteeing the income provided by final-salary pensions.

The move to a flat-rate state pension should be much more widely welcomed, however.

At the moment, the state pension system is a bewildering mish-mash of National Insurance contributions, extra payments (in the form of the State Second Pension), and means-testing.

And it’s the last of these – the means-testing that is required to qualify for pension credit – which is the most damaging.

As things stand, any pensioners whose total income – from state and private pensions, as well as from savings or other investments – falls below a certain threshold can apply for a weekly pension credit top-up.

But there are two issues with this: firstly, many people find the means-testing process very intrusive (although it could be argued that this is how it needs to be).

The second problem, on the other hand, is much more damaging.

Essentially, the pension credit system is sending a message that for those who are, say, 10 or 15 years from retirement but don’t have much in the way of pension savings, there is not much point in starting to put money aside.

That’s because any extra income that a small pension pot generated would simply reduce the individual’s entitlement to pension credit. So the money they saved up could end up making them no better off.

Pension credit acts as a disincentive to save for thousands of people who could potentially put together modest, but useful, retirement pots.

The scheme is well intentioned, and goes a long way to helping many older people get by. But replacing it with a universal payment that can cover reasonable living expenses overcome the drawbacks I’ve mentioned.

It’s not yet known exactly when the flat-rate pension will be introduced – 2015 is the consensus view at the moment – but it now seems certain to arrive at some point.

So if you’ve been putting off setting up a pension because you weren’t sure it would be worth it, the message is now clear: get saving.

Comments

[Jonathan Dawson]

Given that it is likely that male annuities will be lowered to the same level as female ones to comply with equality legislation, I see little incentive to invest more in a traditional pension. There could be some merit, however, in investing by other methods for retirement, given the move away from means testing. Infact, this encourages greater investment in ISAs (or other tax efficient vehicles) and less in pensions.

[Alyson Thomson]

I understand that if the flat rate State Pension is introduced, no one who is already retired will get it!

[Christian Louboutin Outlet]

Hi ,thanks for this post.
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