The recent report published by the Pensions Commission in the UK warns of a 57 billion pounds sterling shortfall in the amount people are saving for retirement, with millions of people facing poverty in retirement unless they begin to save.
The report, entitled Pensions: Challenges and Choices, The First Report of the Pensions Commission, was chaired by Adair Turner, a former Director General of the Confederation of British Industry (CBI), at the request of the government. The report shows that the ‘pensions gap’ (the difference between what people should be saving and what they are saving) is much wider than predicted. The UK’s ageing population means that, in future years, taxpayers will have to support an increasing number of over-65s through the state pension. The falling of the retirement age to 62 does not allow people time to save enough money for retirement.
The report concludes that there is no single solution to the problem. The increasing proportion of the population who are retired means that society and individuals must choose from a mix of four options. These are:
• Pensioners becoming poorer in relation
to the rest of society
• Higher taxes and/or National Insurance contributions devoted to pensions
• Raising savings
• Raising the average retirement age
The report argues that the option of poorer pensioners is the least attractive and that some combination of higher taxes and/or NI contributions, higher savings and/or a later retirement age will be required. According to Turner, the UK’s state pension system is one of the least generous in the developed world. He also points out that private pensions are becoming less generous as companies are unable to afford to offer final-salary or defined-benefit pension schemes. “The long-term shift away from defined-benefit to defined-contribution schemes has become a flood as the fools’ paradise of overvalued equity markets has come to an end.
A major shift of risk is occurring – from the state, employers and the financial services industry, to individuals who are often ill equipped to deal with it.” The current Director General of the CBI, Digby Jones, had already called upon the government not to exacerbate the pensions crisis by further eroding the position of UK pension funds. He labelled the government’s decision to do away with the pension tax credit “a grave mistake” that has cost pension funds some five billion pounds sterling per year. He asked ministers to “do nothing to add to the employer costs if we are to reinvigorate the UK’s voluntary system”.
The 57 billion pounds that needs to be spent each year will only bring state spending on pensions up to the European average (around 11 per cent of gross domestic product compared to the UK’s current six per cent). As many other European countries are also facing a ‘pensions black hole’, I fear that the average may not be high enough for everyone to lead a comfortable life in retirement. Most of my readers will be breathing a sigh of relief that they have already retired, but may still be concerned about how this will affect their children, who are still working. The report is alarming, and it does not present a very attractive picture of a future Britain.
The government is expected to respond by explaining plans to encourage people to delay their retirement beyond the state pension age by rewarding them for working longer. The Pensions Bill, which will soon become law, includes provisions for people to defer drawing their state pension entitlement in return for a lump sum payable when they start claiming.
The prospect of having to work longer, possibly up to 70, is unlikely to appeal to many people, although the rewards may help compensate. Workers with an average state pension entitlement will receive 5,000 pounds sterling for deferring retirement benefits for one year. This increases to 11,000 pounds sterling for two years and 30,000 pounds sterling for five years.
The British charity,Age Concern, was quick to warn against any increase in the state retirement age, pointing out that the average life expectancy amongst male manual workers is just 71, so many would die before reaching retirement age.
One worrying question for both those still working and those already retired is how will the government make up the shortfall? The response could affect everyone, including those with homes overseas. The report makes it clear that the government has to seriously consider raising taxes. Anyone considered resident in the UK will have to pay these higher income taxes. You will be treated as being resident there for a tax year if you spend 183 days or more in the UK during the tax year, or if you are present in the UK for an average of 91 days or more per annum over a period of four tax years. Besides this, inheritance tax (which affects many expatriates) could be raised – indeed, a proposal to do just this has already been presented to the government.
The UK Chancellor, Gordon Brown, has already declared that he does not consider putting up taxes to fund pensions an option. A Treasury spokesman announced: “The Chancellor has made it clear that he will do nothing to put the public finances at risk, including increasing public spending on pensions to European-style levels.”
It is hard to see, however, how Brown intends to help plug the shortfall without increasing taxes. The Conservative Party has pledged to cut inheritance tax and reform income tax if they come into power, but again, if they do not do this, how will they raise their part of the 57 billion pounds sterling needed each year?
The UK Treasury and Inland Revenue are already vigilant in tracking down tax evaders, but we can expect more of this in the future as the government seeks ways of increasing its coffers. In this age of increased exchange of information between international tax authorities, your local taxman could then easily find out about indiscretions in the UK.
Digby Jones of the CBI has said that he is, “confident we can get things back on track, but only if employers, the government and individuals all accept their responsibilities”. I fear these “responsibilities” will include higher taxes.
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