IT HAS been hailed as the biggest shake-up of UK pensions for 60 years. The UK Government’s long-awaited White Paper on pensions reform has been published and carves out a new regime for future retirees, which means that employers, and employees, will have to get used to a new way of financial planning for retirement.
The revolutionary pension reforms are necessary to pay for the escalating number of people reaching pensionable age from 2010. Unless something is done to pay for the increasing demand on the pensions’ pot, the shortfall could be catastrophic.
The main impact of the reforms is that the age of retirement will rise, but British expatriates, nearing pensionable age, will be pleased to know that they will be unaffected. The retirement age will rise in stages to 66-years-of-age between 2024 and 2026, to 67 between 2034 and 2036, and to 68 between 2044 and 2046.
People between the ages of 38 and 46 will have to work a year longer, those in their 30s two years longer, and younger people in their 20s will work for three more years before they can retire with a state pension.
A second key factor in the reforms, is that the link between pensions and earnings is expected to be reintroduced from 2012, if the Government finds it affordable. This will bring pension increases in line with earnings, and not prices, as they are currently. Pensions were linked to earnings in the early 1980s but were severed when Margaret Thatcher was Prime Minister.
Retirees in the future can expect to receive a rise in value of their weekly pension payout, in real terms, to 135 pounds sterling, and means testing will be curbed. This will almost double the pensions of today.
Women who take career breaks for family reasons will only need to pay in contributions for 30 years, instead of 39, to qualify for a full state pension from 2010. It is estimated that the number of women who will be able to claim a full state pension will rise to 70 per cent from the current 30 per cent.
There will be automatic enrolment for all employees into a new national pension savings scheme, where there is not otherwise an occupational pension scheme in place at their employment. They could opt out, but if not, employees will contribute four per cent of their salary, while the company contributes three per cent and the Government one per cent as tax relief. Called Personal Accounts, the scheme is likely to produce a second pension of approximately 80 pounds sterling a week for average earners by 2050.
According to AccountingWEB, the Association of Chartered Certified Accountants (ACCA), the proposals made a “promising start” to reforming the pensions system, but warned that concerns still existed.
It said raising the state pension age to 66 or 68 will require a major shift in attitudes to the employment of older people, while the White Paper also fails to offer tangible incentives for employers to offer occupational schemes for their staff. ACCA also expressed worries over compulsory employer contributions to the National Pension Saving Scheme (NPSS).
The Forum of Private Business said that the government was “sneaking in a stealth tax on employment” and that the Government is “… intent to let employers foot the bill for the pensions black hole.”
The reforms could cost UK businesses 2.6 billion pounds sterling, and the overall package, 18.6 billion pounds sterling, equating to a four pence hike in income tax by 2050. However, the Government has implied that the reforms can be introduced without large tax increases and that other budgets will have to be cut.
Work and Pensions Secretary, John Hutton, said the scheme was designed to make people provide for their old age. “Today’s White Paper seeks to entrench a new pensions savings culture, where future generations can take increasing personal responsibility for building their retirement savings … I believe it can lay the foundation for a new and lasting consensus, on a long-term resolution of the pensions challenge we face as a country.”
The White Paper is the Government’s reply to the Pensions Commission report on pensions reform, chaired by Lord Turner last year. The main recommendations of Turner’s report have been followed, although the Government has brought forward the retirement age suggested in the Turner Report. The link to earnings has also been delayed by the Government, by two years. Turner recommended restoring the earnings link by 2010. This is likely to save the Treasury 1.7 billion pounds sterling.
Britain’s Labour Government has also been accused, by the Conservative Party, of a “stealth tax on middle income earners.”
According to Shadow Work and Pensions Secretary, Philip Hammond, the Government is expected to freeze the maximum pay level on which second pension rights accrue through national insurance contributions, but has no plans to freeze the amount on which national insurance contributions are payable.
He argued that, by 2033, when the second pension will become a flat rate benefit, people earning more than the equivalent of 18,000 pounds sterling a year now, will be paying contributions on part of their salary, for which they receive no pension benefit in return. “This amounts to another stealth tax on middle income earners,” he said.
At present, almost 12 million people in the UK are not saving enough for their retirement. Unless action is taken now they face a meagre old-age.
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