What the pensions crisis means to you

 

PEOPLE will receive a more generous state pension in return for working longer, it was reported today. Under recommendations from Lord Turner's Pensions Commission, due to report at the end of the month but leaked in advance, the age at which people will be eligible to claim the state pension is expected to rise from 65 to 67.

Below, we answer some of the frequently-asked questions surrounding the increasingly controversial issue of the state funding of retirement.

What is the pensions crisis?

More than 12m people over the age of 25 are not saving enough for their retirement, according to an interim report from the Pensions Commission published in 2004. Workers will suffer a 30% cut in their retirement income and spending on pensioners would have to rise by £57bn a year to keep pensions at the current level unless action is taken.

The commission also said that 11.3m workers were not making any contributions to a private pension scheme. All this means many people who have been saving throughout their working lives may find their income on retirement falls well short of what they had hoped for.

What has caused the crisis?

Put bluntly, there are more people of retirement age on pensions because we are all living longer. An ageing population means that there are not enough taxpayers of working age to pay pensions for everyone. It means pension providers are faced with paying out for longer periods than estimated, and is made worse by the fact the birth rate is falling.

Falls in stock market returns for pension companies, which rely on them to pay policy-holders, have also made it difficult to fulfil obligations.

Lord Turner said many people in the 1980s and 1990s were 'fooled by an irrational exuberance in equity markets' and that the problems dated back as far as the 1970s. The commission has also blamed a fall in the average age that people are taking their pensions, which is down to 62.

What are the choices?

Four 'unavoidable choices' have been put forward by the commission.

• Future pensioners will be poorer than they are today.

• Taxes and national insurance contributions will have to rise or public spending will need to be cut.

• Each generation will have to save more and will be reliant on the next generation also saving more.

• Retirement ages will have to rise.

The commission is likely to recommend a combined approach involving the latter three choices, including raising the age of retirement to 67 for all and automatically enrolling people into a savings scheme when they start work.

What about the state pension?

At the moment men receive their pension at age 65 and women at 60. The current payment for single pensioners is £82.05 a week, while a married couple receives £131.20 a week. These figures assume full National Insurance contributions, for which people need to have worked a set number of qualifying years. For men, this is 44 years and for women who reach 60 before 2010, it is 39 years. The pension age for women will go up to 65 in 2020 so the number of qualifying years a woman needs will gradually increase to 44 years.

Have problems with private and occupational pensions deepened the crisis?

Successive governments have led a concerted effort to encourage people to save for their retirement and not rely solely in state handouts. But in the early 1990s, mis-selling of pensions led many people to opt out of their existing occupational pensions, where their employers contributed, and set up private pension schemes.

These have turned out to be worth less than expected and have left many worse off than they would have been had they stuck to their original pension plans.

The mis-selling scandals also turned many people off pensions as the way to pay for their retirement, with some opting for alternatives such as ISAs or buying property. The result was a massive under-investment in the pension industry. Many companies have now closed their final salary schemes and have been further cutting back on contributions to their employees' retirement pot.

What does it mean for the average worker?

It means the amount of money needed to be put aside if they want to enjoy a comfortable retirement is rising all the time. Experts predict a 30-year-old man wanting to give up work at 65 on an annual income of £20,000 in today's terms would need to save more than £260 per month. Women who take career breaks will face even higher contributions if they are to have a comfortable retirement.

What does the Government say?

Tony Blair has called for people not to be 'written off' at the age of 65, fuelling speculation about a rise in the retirement age. Earlier this year, Unions also threatened the biggest strike in Britain for decades because of controversial plans to increase the pension age of public sector workers from 60 to 65.

Downing Street insisted on Wednesday that Mr Blair backed Trade and Industry Secretary Alan Johnson over a deal with the TUC, whereby existing workers would be able to retain their existing pension arrangements.

New employees will be guaranteed index-linked pensions and will still be able to retire at 60 if they want to. Downing Street said the deal was 'within the terms' agreed by the Cabinet. The Times reported that Mr Blair accepted that the Government case for raising the retirement age to 67 for other workers had been undermined by the deal.

What do the other political parties say?

The Tories have said they would increase the basic state pension in line with earnings instead of prices. Over four years, this would add up to another £7 a week for single people and £11 a week for a couple. They also plan to introduce a Lifetime Savings Account to which the Government would contribute.

The Liberal Democrats have said they will ensure the basic state pension is increased by more than £100 a month for single pensioners and by £140 a month for couples at 75. They plan to base entitlement on residency, not National Insurance contributions, meaning women who stay home to bring up children will not lose out. They also advocate a 'flexible decade of retirement' so that people are not forced to retire at a set age if they do not want to.

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