By Bill Blevins,
THE UK Pensions Bill is finally here, a year after Lord Turner’s Pension Commission report and its suggestions on how to reform an outdated and unfair pensions system and head off a looming pensions crisis.
The main thrust of the Bill is the raising of the state pension age to 68 in 2046. The pension age will rise in stages: to 66 by 2026 and to 67 by 2036. John Hutton, Secretary of State for Work and Pensions, explained: “It is a big step, but is absolutely the right way to meet the demographic challenge, so that we do not burden our children and grandchildren with the cost of a population spending longer and longer in retirement.”
The Pensions Bill also introduces major beneficial changes for women, who for years have lost out on pension income, due to time taken out for child rearing and caring of elderly or sick relatives.
Statistics show that around two thirds of retired people are women whose average retirement income is around 50 per cent of that of men. It is estimated that in future years, the reforms will see 75 per cent of women receiving a full state pension by 2010 and 90 per cent by 2025, compared with 30 per cent in 2006.
Due to shorter working lives, career breaks and, on average, longer lives than men, women need to contribute more to ensure their entitlement to a full state pension. For a five year break from work, women should look to increase their basic contributions by two per cent and, for a 10 year gap, this needs to increase by three per cent per annum. For periods of unemployment, voluntary National Insurance Contributions (NICs) can be made either during the period or soon after return to work.
At present, to qualify for a full state pension, women have to pay 39 years of NICs and men need to contribute 44 years. Under the new Pensions Bill, from 2010, both women and men need only pay NICs for 30 years to qualify for a full state pension.
Earnings link restored
The link between pensions and earnings will be restored – but not until into the next parliament, in 2012, and most probably even later, by 2015.
Critics say that, by delaying this reform for six years or more, means that millions of pensioners will miss out on the benefits altogether. Pensions have been linked to prices since 1980, when Margaret Thatcher, then Prime Minister, removed the link between pensions and earnings. Pensions linked to prices are lower than linked with earnings.
Statistics released in a survey commissioned by The Daily Telegraph reveal that the real rate of inflation for pensioners is now nine per cent – almost four times the official rate of 2.4 per cent. Age Concern said that the delay in restoring the pension link to earnings will mean that the basic state pension will be worth 10 pounds sterling a week less by the time link is restored in 2012.
Personal accounts are also scheduled to be introduced in 2012, a new work related pension scheme to which employers will have to contribute three per cent and employees invest four per cent of their salary. Enrollment will be automatic, although employees can opt out.
A delivery authority will be set up to create a national system of personal pension accounts. Ten million employees at present, who do not have a pension, will be enrolled in the scheme.
The new Pensions Bill, which will be known as the Pensions Act 2007, follows almost a year after Lord Turner’s Pension Commission report, where recommendations were made to update the pensions system. Proposals included raising the retirement age to 68 by 2050, eligibility for a UK pension depending on residency and not NICs, pensions to be linked to wages and not prices by 2010, people over 75 to receive a universal state pension and all workers not already belonging to a pension scheme to be automatically enrolled in a new National Pension Saving Scheme aimed at those earning between 5,000 and 33,000 pounds sterling. Employees on this scheme would have to contribute four per cent of earnings, while the employer would contribute three per cent and the government to give one per cent tax relief.
What does it all mean?
Despite all the proposals detailed above, the fact remains that anyone who is solely reliant on State pensions for their income in retirement is likely to have great difficulty in “making ends meet”.
The one inescapable fact is that we are all living longer. The general concept of retirement at say 65, and to then enjoy say a 20 or 25 year “permanent holiday” does sound very appealing.
However, this extended holiday does need to be paid for, somehow.
One of the keys to this will be an effective and efficient financial planning programme. It is not just about pension planning, although clearly pension planning does have a key role to play.
The new Pensions Simplification Act, which became fully operational as from April 6, 2006, (generally referred to as A-Day), does offer some excellent tax and pension planning opportunities.
If you have any concerns about your financial planning in retirement, or want to confirm how all the new rules affect you and if you can benefit from them, contact a financial adviser with thorough knowledge of the UK pension system, as well as how your pension will be taxed in Portugal. Blevins Franks, for example, has a specialist pensions department in our UK office, working alongside the local Algarve office.
To keep in touch with the latest developments in the offshore world, check out the latest news on our website www.blevinsfranksinternational.com