How can pensions be made to work?

dunstonh

Why do you want to phase out S2P?

Its complicated and only a limited number of working people get it.

EdInvestor

dunstonh wrote:

Its complicated and only a limited number of working people get it.

I agree it's complicated, partly that's because it's earnings-linked and you needd to get a personal forecast to find out how much you will get.

Partly also it's because of Gordon Brown (let's face it, while he's in charge tax and benefits are going to be complicated). :rolleyes:

The reason only a limited number of people get it is because the rest have decided to "contract out".It's the less well off that are "contracted in" and who get the S2P.

So again you want to penalise the less well off.

But isn't the so called "pensions crisis" all about trying to increase the pensions of the less well off? Or is the "crisis" just a whinge from the rich?

In which case why should anyone waste time worrying about it?The well off can look after themselves.

Pal

S2P should be abolished because it is an earnings related state handout. I.e. it gives more money to people who need it least because they earned more when they were working.

What justification is there for using taxpayers money to pay higher state benefits to those who could afford to save more while they were working? You could argue that they have paid more in NI, but that doesn't make sense either. Applying that logic would mean that income support or unemployment benefits would be higher for those who were earning more while they were working.

The welfare state is a fallback mechanism that should provide a minimum level of income required for a person who has fallen on hard times to live. Unfortunately the state pension system has instead become the preferred provider, rather than something that people wish to avoid falling back on.

A higher flat rate pension may even save taxpayers money because it could be pitched at a lower level than combined BSP and S2P currently provides, and it would require far less administration, saving costs.

It also gives a very obvious base level income that is predictable in retirement. People can then save additional money to top up their retirement income, knowing how it will benefit them.

Your comment that "houses are pensions" for many people is (IMHO) complete tripe borne out of the housing boom. When the next housing crash comes (and it will at some point) housing and mortgages will be seen as the liability that they are. An essential liability maybe, but a liability none the less. Using housing as a "pension" is a great idea until you need to sell at the same time that every other pensioner in the country is trying to do the same thing.

EdInvestor

Pal wrote:

S2P should be abolished because it is an earnings related state handout. I.e. it gives more money to people who need it least because they earned more when they were working.

It is earnings related, but it's capped at a pretty low level.The highest amount I've ever heard anyone getting is about 80 quid a week, doubling the state pension, but we're not talking gold sovereigns, that's only 8,320 a year.

Basically what you're suggesting would cut the low paid person's 160 quid a week to 120 quid, and redistribute the missing 40 quid to the better off who would see their pension rise from 80 to the same 120 level.

Take from the poor and give to the rich, is that the idea?

All the better-off people with company pensions are anyway contracted out of S2P. Those getting basic state pensions and nowt else are still going to be at the lower end of the pile.

The welfare state is a fallback mechanism that should provide a minimum level of income required for a person who has fallen on hard times to live.

No, that's not how it is supposed to work.A state pension is not just for someone who has 'fallen on hard times." And nor is free medical care.The Welfare State enshrined these as the right of the whole population, rich or poor, who paid their NI.

Your comment that "houses are pensions" for many people is (IMHO) complete tripe borne out of the housing boom. Using housing as a "pension" is a great idea until you need to sell at the same time that every other pensioner in the country is trying to do the same thing.

You don't have to sell your house to realise an income from it.You can sell a part of it (home reversion) or raise a lifetime mortgage (equity release) or possibly take in lodgers (tax free income).A BTL property with mortgage paid off provides another income stream or additional capital to invest for income if you sell it.

Retired people have been trading down from big family houses to smaller places and elderly people's accommodation for decades and using the profit to provide extra income.Nothing new there and no disruption to the housing market seen.

I am not saying one should rely only on property for retirement income.But you'd be mad to ignore it.

dunstonh

The reason only a limited number of people get it is because the rest have decided to "contract out".It's the less well off that are "contracted in" and who get the S2P.

Its based on middle band earnings to the low earners dont get it. Self employed also dont get it (which was where the main focus of my comment was really aiming at).

Whether you are in or out isnt really an issue. Thats just an added complication.

Debt_Free_Chick

dunstonh wrote:

Its based on middle band earnings to the low earners dont get it. Self employed also dont get it (which was where the main focus of my comment was really aiming at).

Whether you are in or out isnt really an issue. Thats just an added complication.

I thought low earners got a "geared up" amount of S2P i.e. treated as though they were earning £18,000 p.a.?

Milarky

Debt_Free_Chick wrote:

I thought low earners got a "geared up" amount of S2P i.e. treated as though they were earning £18,000 p.a.?

Actually the figure is £11,600 for low earners [but at 40% accrual under S2P rather than 20% as under SERPS]. Thus you are almost correct,therefore, because under the old rules someone would have to earn:

£11,600 +[£11,600 - £4,100] which is about £19,100 in 2004/05

to reach the same annual credit as they do just by earning more than £4,100 but less than £11,600 today.

Back to complexity..
There's also different regimes for individuals and for members of contracted-out money purchase [COMP] employer-run pensions. The latter don't get an annual rebate of NIC but pay 1.6% less NIC out of pay. In return their scheme is only intended to target the rate of SERPS benefits [20%] so that the difference between this and S2P [20% up to 40%] is 'credited' back through the NIC which they do pay. These people are effectively contracted out of the 'SERPS element' of S2P only!

What a dog's dinner!

General sentiment - simplify all this..
Thus Pal's suggestion of merging the basic state pension with the second state pension - but at an intermediate level makes sense. There are just too many different bits of NICs which 'pay' for different things and it's a recipe for unfairness as well as needless complexity.

For instance, you need 10 qualifying years to receive any basic state pension at all. But every 'qualifying' year for BSP is also a qualifying year for S2P - which has no such similar rule - at the 'low earner' rate . So you could just work for nine years and get no BSP whatever, whilst receiving a pro rata 'second' pension! How pointless is that?

If we can clean up the state pension in a way that commands general agreement then we could even put an earmarked tax on it in order to garner some respect and confidence. Now that would be bold!

Pal

Editor wrote:

Basically what you're suggesting would cut the low paid person's 160 quid a week to 120 quid, and redistribute the missing 40 quid to the better off who would see their pension rise from 80 to the same 120 level.

Take from the poor and give to the rich, is that the idea?

No. Simplify the criteria for recieving the bsp so it is paid to more people. It is the wealthy who have paid full NI who would lose out while those people who only worked 9 years and part time low earners etc would gain. Major savings would also come from vastly decreased paperwork and record keeping requirements.

You could throw in some mechanism to knock money off the BSP for wealthy people who had contracted out, but that is complicating matters in our utopia.

No, that's not how it is supposed to work.A state pension is not just for someone who has 'fallen on hard times." And nor is free medical care.The Welfare State enshrined these as the right of the whole population, rich or poor, who paid their NI.

I.e. it is a wealth distribution mechanism that few people are going to willing to pay for in the future as the number of taxpayers drops compared to the number of elderly. The BSP, whether it is supposed to be or not, IS minimum income provision for people over a certain age who fulfil certain criteria. People who do not qualify get a similar amount of money through income support instead. This is why it has become the UK's pension provider of choice, and why so many are happy to rely on it.

This is why I suggested abolishing the BSP and S2P entirely and just paying out income support. The amount of money can be the same, but it is one less government department required to run it. You could even have a criteria that over 65's do not need to be actively seeking work to qualify, and do not have means testing of any other benefits. The point is to put the stigma of being unemployed onto those who have failed to save for their retirement. There are many people in this country who are not saving for retirement but are happy to drive new cars, go on holiday, live in large houses and so on. These people need reminding that they will be relatively poor when they retire. What better way than renaming the basic state pension as "unemployment benefit"?

There are all sorts of things that could be done if the political will was there. Luckily for the UK I am not in charge.

You don't have to sell your house to realise an income from it.You can sell a part of it (home reversion) or raise a lifetime mortgage (equity release) or possibly take in lodgers (tax free income).A BTL property with mortgage paid off provides another income stream or additional capital to invest for income if you sell it.

So you believe that a growing pension population should all own the BTL houses which they rent to their children to provide income? What are the children going to do to for their pensions? Or perhaps you think that all these children will somehow conjour up the money to buy their parents big houses when they retire and want to downsize? What if house prices crash just before you retire? The value of pensions can be protected by investing in bonds and cash. Individual properties cannot.

It works on the small scale but if everyone tries it will fall apart very quickly.

Paul_Herring

Pal wrote:

So you believe that a growing pension population should all own the BTL houses which they rent to their children to provide income? What are the children going to do to for their pensions?

<tongue in cheek>Surely by the time said children are hitting retirement age, they will have inherited the houses? </tongue>

On a more serious note - on what basis are all these projections that the ratio of working to pensioned is changing? Do the numbers take into account immigration, (which I think will have to increase in order to get people to do all the jobs that people will be retiring from.) Or is that taking this thread off-topic?

EdInvestor

What are the children going to do to for their pensions?

They're going to inherit their parents' drawdown fund as there will no longer be a requirement to give the money to an insurance company in exchange for an annuity.:)