'Universal' pension won't be universal
The Coalition's plans to introduce a universal pension may do more harm than good.
I was really surprised when I heard last year that the Coalition was planning to introduce a universal pension. It’s a great idea in theory but I feared that the cost would be too high for the likes of George Osborne. Turns out I was right to be surprised, the government is considering a universal pension scheme that won’t be truly universal.
Let’s just quickly recap the current government provision for a single UK pensioner. There are three elements:
- The basic state pension of £97.65 a week. (All single pensioners get this assuming they have made sufficient National Insurance contributions during their working lives.)
- Means-tested benefits such as Pension Credit. There are only paid to pensioners on low incomes with small savings. These can boost the single pensioner’s income to £132.60 a week.
- State Second Pension (S2P) (formerly SERPS). A top-up to the state pension that some pensioners receive depending on their earnings in the past. Some people have opted out of this scheme during their working lives and contributed towards a private pension instead.
There are several problems with the current set-up. Firstly, not everyone gets the basic state pension. If you haven’t paid national insurance contributions for at least 30 years, you won’t get the full pension. That can be a problem for women (or men) who have taken time out to look after a family.
Secondly, people who have saved prudently for their retirement often feel they have been punished for their prudence. If you’ve built up a savings nest egg of £16,000 or more, you receive no Pension Credit whereas your neighbour who has saved nothing gets the payments. As a result, a prudent saver may end up no better off than an irresponsible spender.
What’s more, means-tested benefits aren’t claimed by everyone who is entitled to them. They’re also bureaucratic and cost money to administer.
In a perfect world, the solution would be to introduce a universal pension that everyone would receive, perhaps at £140 a week. Your savings would be irrelevant as would your National Insurance contributions. Savers wouldn’t be punished and everyone could lead a dignified retirement.
Of course, the problem is cost. Especially when you remember that the population is ageing. So I was surprised when I read last year that the government was planning to introduce a universal scheme.
However, this week we learned that the government isn’t planning a full universal pension. Pensions Minister Steve Webb told Money Marketing that the government was still working on its plans but emphasised:
“We will ensure that any proposals for reform take proper and fair account of contributions that have already been made and, contrary to speculation, the state pension under any reforms would continue to be based on National Insurance contributions.”
So if you haven’t paid thirty years’ worth of National Insurance contributions, you won’t get the full Universal Pension. Not a universal pension at all. Webb’s comment also suggests that pensioners who opted out from S2P/SERPS will receive lower payments that those who stayed in.
On the other hand, it looks like the current penalty for savers will be removed – although that’s not 100% certain.
If we do get to a stage where prudent savers aren’t punished, that will be a boon for many pensioners. But I fear that whatever is eventually proposed by the government will be just as complicated as the current rules. And cost will remain an issue. In fact, if the abolition of means-tested benefits is paid for by pushing the state retirement age even higher, I might end up wishing that Webb had left the current system alone.