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Protest against an unfair flat state pension?

Retirement | State Pension Helpful? 16

Asked by malcysykes, submitted 16 January 2011.

Open Quote I am writing to you in the hope that you can bring a financial issue, a scandalous one in my view, to people’s attention more easily than I.
I refer to current government proposals regarding the State Pension Scheme in 2015. As I’m sure you are aware, the key proposals are that from that date, all individuals newly retiring will receive £140 per week. This will not apply to people who retired before that date, to whom current arrangements will continue to apply.

The affect of this on married couples is staggering. A couple retiring under the new scheme will receive £280 per week between them, whereas a couple who retired just before will continue to receive the couples’ rate of £156.15 per week (rate for 2010)at most.

This difference of £123.85 per week sounds alarming, but is more so if you consider the capital equivalent of this “loss”

£123.85 per week amounts to £6,440.20 per annum. If you look at how much a couple would have to invest in an annuity to make up this difference on a like for like basis, the figures are remarkable.

The annuity would need to be an escalating one to match the terms that the couple who retired post-2015 would receive on this difference. To be fair in comparison, the annuity could be a cheaper single life one, as the post-2015 couple would lose £140 of their joint income should one of them die. A male of 65, on this basis, could receive an annuity of, typically, 3.6%. This is the fairest option once again, as a woman would receive a worse rate.

To make up the difference, the cost of the annuity would be £178,894. As this would be a lifetime purchased annuity, there would be some tax advantage on the income generated compared with the post-2015 couple. However, this is more than cancelled out by the fact that the pre-2015 couple will have paid tax on the earnings necessary to generate the capital needed.

In effect, a couple retiring just after the changes are being gifted almost £180,000 compared to a couple maybe just a year younger.

This cannot be right, particularly from a government which has preached about “fairness”. I’m sure from the lack of “noise” that the public can’t be aware of this, or at least of the ramifications of this.

I realise that these are just proposals, but If you agree, what can be done to register protest at this before plans are realised by the government?
End Quote

Answered by Justin on 18 January 2011

Thanks for some interesting figures and your well reasoned argument.

I'd welcome a higher state pension for the majority, but in practice this requires money (as your figures very clearly highlight). And therein lies the problem, governments with a crippling financial deficit can't afford to spend more on social benefits. This is a particular problem given our population is ageing as there'll be fewer working (hence paying taxes) to provide a state pension for a growing number of pensioners.

To keep the overall spend unchanged and make most pensioners better off, the Government will need to make others worse off, probably by quite a lot. This would likely mean reducing benefits for those who've accrued additional pension via SERPS or S2P (including those who've contracted out), which seems grossly unfair.

And, of course, those who retire pre 2015 on a basic state pension could be rather worse off than those who retire on a higher flat pension, which hardly seems fair - as per your argument.

I think the initial announcement last year was ill thought out - it was basically a bold statement with no supporting details (par the course in politics!). And we might be waiting some time for that detail, as the publication of a green paper (i.e. a Government consultation into the proposal) has been delayed - supposedly because the Treasury and Department of Work & Pensions can't decide how to treat those who've contracted out of SERPS/S2P.

An annoying, unintended, side effect of all this is that those who want to top up their existing state pension by buying extra years currently have no basis on which to make a sensible decision. Unless the flat pension plans build in provision for this then extra contributions might turn out to be a waste of money.

Rest assured I will moan very loudly (and encourage visitors to this website to do the same) if the proposals, when eventually published, appear unfair. But for now I think it's probably premature to protest as there's too little to go on and there's a fair chance these plans will not see the light of day.

Let's watch this space...

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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