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● LibDems: Support Labour’s timetable for raising state pension age, but aim to introduce
citizens pension
Helen Pridham and Simon Bain Share 0 comments
24 Apr 2010
A hung Parliament could be disastrous for pensions across the UK if a Liberal Democrat pledge on pensions tax relief were to be supported by Labour, the country’s pensions experts have warned.
The Association of Consulting Actuaries (ACA) said this week that a manifesto pledge by the LibDems to raise £3 billion through scrapping higher rate tax relief on pension contributions was a policy that might easily be attractive to a LibDem-Labour pact.
Keith Barton, chairman of the ACA, said: “Aside from the fact that such a policy would impact on millions of middle-earners, damaging their pensions, it could also lead to immediate tax charges for many of those in defined benefit schemes – hundreds of thousands of private and public sector employees could be affected.”
Barton went on: “Worse still, such a measure could easily be the final straw in the closure of what is left of our ‘quality’ schemes, with senior staff and directors no longer seeing any future in remaining with their company scheme. As ever, those who will suffer most will be those on modest incomes, unable to replace the value of a lost ‘quality’ scheme. Meanwhile, the [Government’s] hopes for extra revenue may just melt away, as the higher-paid move their savings elsewhere, including offshore.”
The ACA says all three main political parties’ policies for pensions and retirement income are at best threadbare, often piecemeal and at worst potentially damaging.
Barton said: “This is just the time when imaginative proposals in the manifestos could set the scene for the period ahead.
“Instead, the statements in support of private pensions are bland and largely unspecific, allowing
‘wriggle room’ for these to be low priority in the next Parliament. Even NEST, the Government’s flagship scheme for extending basic level pensions to many more people, supported in the main by the opposition parties, warrants not one direct mention in any of the three main party manifestos.”
The parties’ pledges to improve the state pension system are similar. The Conservatives say they will restore the link between increases in the basic state pension and rises in earnings quicker than Labour, that is within the next Parliament rather than in 2012. However, the Conservatives have also said they plan to bring forward the date at which the state pension age starts to rise to 66 to 2016 for men and 2020 for women.
The LibDems support Labour’s timetable for raising the state pension age, but are aiming to introduce a citizens pension whereby eligibility for the basic state pension is determined by citizenship as in New Zealand, rather than on the length of somebody’s National Insurance contribution record.
The LibDems are also pledging an annual 2.5% increase in the state pension, come what may, even if earnings and/or price inflation fall below that level.
Meanwhile, for anyone reaching retirement this month, it has become considerably easier to qualify for a full basic state retirement pension.
Until now, women needed 39 years of National Insurance contributions to qualify for a full state retirement pension, while men had to clock up 44 years. Both now need only 30 years of
contributions.
Ian Naismith, head of pensions market development at Scottish Widows, said: “Many women have incomplete NI records because they have taken career breaks to look after children. Under the old
system only around 50% of women would have got a full basic pension this year but under the new rules 70% will qualify. By 2025, 90% will get a full pension. For men, the difference will be less marked as 85% already qualify.”
It will also be easier to receive a partial state pension.
Previously, contributions had to be paid for at least 25% of the full term – around 10 years – to get anything back. Now, even if you have only contributed for five years a proportionate pension will be paid.
The reduction in the number of qualifying years will mean most people no longer need to pay voluntary Class 3 NI contributions to make up for gaps in their records.
Laith Khalaf, pensions analyst at financial advisers Hargreaves Lansdown, said: “If you are 40 and have missed a couple of years, it will probably no longer be necessary to make up the difference, as you will still have time during your remaining working life to make up your 30 years of
contributions, and if you pay any more than 30 years you won’t get any more benefit. So it will be better to wait until you get closer to retirement to find out whether you need to top up.”
However, anyone who has retired since April 2008 on a less than complete pension could find that topping up their NI contribution record still makes sense. Normally, it is only permissible to buy back missing contributions for the past six tax years, but the Government is allowing recent pensioners to buy back another six years going back to 1975 to make up their pension.
Even though the current basic state pension is only £97.65 per week, paying voluntary contributions can be a good investment.
Naismith said: “You get far more value than you would from a private pension scheme – within five or six years you get your money back.”
It may not always make sense.
Khalaf says: “For women who can claim a pension based on their husband’s NI contributions, it will only be worthwhile if they can boost their own pension above the dependent’s rate which is around two-thirds of the full amount.
“Similarly if you have very few other savings and are going to qualify for means-tested benefits, it will not be of any benefit because the state will top your income up to £130 a week anyway.”
However, from this month until April 2020, the state pension age for women is being gradually increased to 65 to bring it into line with men. After 2024, the age at which both men and women will receive the state pension will rise in tandem until 2046 when both will get their state pensions at age 68.