Cameron makes pension mistake

by Ed Bowsher on 18 September 2012  |  17 comments
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David Cameron is demanding a rethink on plans to introduce a £140 universal pension. This is a mistake.

Many prudent savers are pretty fed up when they reach retirement. That’s because they discover that they’re only a tiny bit better off than other pensioners who have saved nothing for retirement.

In Saving in a pension? You are as well off on benefits  we showed how a 65-year old with a £100,000 pension pot gets very little reward for his prudence. In fact, he’ll only get an extra £25 per week compared to someone relying purely on state pensions and benefits.

Solution

The government proposed a solution to this problem last year – a £140 ‘universal pension’ for most pensioners.  Trouble is, David Cameron is reportedly having second thoughts about the idea.

The idea behind the universal pension is that all pensioners will receive £140 a week as long as they’ve paid National Insurance contributions for at least 30 years of their lives.

Right now, pensioners who have paid sufficient contributions receive a pension of £107.45 a week. Then if they don’t have any other income or much in terms of savings, they can claim Pension Credit to top up their income.

The Pension Credit would be abolished if a Universal Pension was introduced, and all eligible pensioners would receive £140 a week instead. This would give working people to save for their retirement. If you’ve managed to save £30,000 for your old age, your state pension income wouldn’t be reduced as a result.

Downsides

I outlined the main downsides to this scheme in Pensions revolution won’t help current pensioners. The one that worries Cameron is the fact that current pensioners won’t benefit from the Universal Pension .

In other words, if you’re already claiming the State Pension and don’t receive any Pension Credit, nothing would change if the Universal Pension were introduced in 2015. The only beneficiaries would be new retirees from 2015 onwards.

That could create resentment between the generations and trigger political problems for the government.

So I can understand why Cameron is nervous, but I think it’s a shame nonetheless. As life expectancy gets ever longer, the need for everyone to save for their retirement grows. Yet many people are put off saving because they think it’s pointless – they fear they’ll be no better off than feckless folk who saved nothing.

I think a Universal Pension would encourage more people to save. For that reason, I very much hope that the government sticks to its guns and implements the scheme on schedule for 2015.

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