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Cameron makes pension mistake

Ed Bowsher
by Lovemoney Staff Ed Bowsher on 18 September 2012  |  Comments 17 comments

David Cameron is demanding a rethink on plans to introduce a £140 universal pension. This is a mistake.

Cameron makes pension 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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Comments (17)

  • gransu
    Love rating 4
    gransu said

    Thanks Ed, so its ok for me to have paid 45 years NI and finish up worse off than someone who has only paid 30 years, or who has never worked and has had their NI contributions paid by me? remind me not to vote for you should you ever enter politics

    Report on 19 September 2012  |  Love thisLove  2 loves
  • rbgos
    Love rating 81
    rbgos said

    Replacing the combo of pension and the top-up pension credit with just a straightforward pension makes sense, for just the reasons given in this article.

    The error is getting rid of the SERPS/S2P bit - not getting anything extra, despite having paid your SERPS/S2P, is grossly unfair - particularly for those who've been paying in for many years, on the promise that it would give them a better pension.

    Report on 19 September 2012  |  Love thisLove  2 loves
  • lynmouth1
    Love rating 1
    lynmouth1 said

    Absolutely right gransu. It appears that this government suffers from the same lack of a sense of fairness as many of their predecessors. It cannot be right for those who have paid in the least to receive a higher basic pension than those who contributed for many more years. If it is a matter of affordability then surely it would be fairer to settle for a lower flat rate that would be paid to ALL retirees.

    Report on 19 September 2012  |  Love thisLove  1 love
  • Mike10613
    Love rating 600
    Mike10613 said

    It was a nice thought, but the government has done the maths and can't afford it. Maybe plan B, will be to increase the basic pension gradually for all pensioners. Maybe they could index link it to RPI or CPI, whichever is higher and leave the guaranteed income in place until the basic pension catches up? Might not work, after all that is a Labour idea...

    Report on 19 September 2012  |  Love thisLove  0 loves
  • MK22
    Love rating 149
    MK22 said

    It often puzzles me, bearing in mind we have computers these days, why any of this is complicated any more. Surely all you do is put the details into your computer database and it works it out. It is what business does, even where there all horrendously complicated pricing and other charges. But then we know the government's or (more accurately) the civil service's track record with computers don't we? But it is odd why those of us who have created the wealth and society everyone is now enjoying should get a kick in the teeth whilst those coming behind us who are screwing it all up and getting the thank yous.

    Report on 19 September 2012  |  Love thisLove  0 loves
  • ronat42
    Love rating 62
    ronat42 said

    The last 4 comments have summed up all of the problems nicely. What constantly amazes me is that the Gov'ts (all of them) seem to open their mouths without doing any sensible research. It doesn't need a computer to work out that if they can't afford the current system they can't afford the more generous albeit ill conceived alternative. It might be more effective to invest a bit in hammering those who cheat the system, not just pensions but the whole set up. All governments seem to manage to make changes which favour the imprudent and punish the prudent. We also have many examples of the benefit system being badly managed.

    Two recent well published examples highlight people living the high life on lies which no-one bothered to check but were blatantly obvious. We don't only have to pay the ill claimed benefits, we have to pay for the investigations, court costs, subsequent imprisonments and the cost of caring for minors while their parents are detained.

    One other example is my mother who, as a pensioner who has virtually no NI contributions, being paid about £1200/month tax free with no rent or council tax to pay. This is money she doesn't need or want but she is told that she is 'entitled'.

    It's all rather like the tax system. It doesn't need revolution, it needs preening and fixing. Perhaps the lessons learned from that will enable some dedicated team to design a better system, that is if the electors don't decide to go for someone who makes promises based on dreams and irresponsible borrowing.

    Report on 19 September 2012  |  Love thisLove  1 love
  • Aitken B
    Love rating 125
    Aitken B said

    The situation is simple.

    The Government took National Insurance from each of us to pay for our pensions thus we are due a pension on that basis. The fact that successive governments stole the money to fritter away on their vanity projects is not our fault.

    Our committment to our welfare state means that we must ensure that people who were not able to pay into the system are not left to starve so we are obliged to protect them with subsistence payments and I mean subsistence payments.

    The "control" of benefit scroungers who have deliberately avoided work and thus NI payments is not an issue for the pensions section, it's the work section that needs to address that problem.

    Report on 19 September 2012  |  Love thisLove  1 love
  • r
    Love rating 72
    r said

    Yes, it is simple! Because our finances have been consistently mis-managed by all previous governments for short term advantages, GB is now in dire straits. We are a rich country in world terms but our leaders just can't manage a household budget. Yes a household budget, because that is what it is but on a massive scale.

    If you don't have enough money at home, you either have to earn more or spend less. Simples!!! What do our politicians do? Go into debt then greater and greater debt. What does Ed Balls says now? Borrow even more. It beggars belief that these intelligent men can't understand basic economics. It's the same with our pension contributions - spend them on something frivolous, something that is the flavour of the month, and let a future generation sort it out.

    Well, that "future generation" is us. Somehow, we have got to make our politicians realise that we need to rein in spending. We need to get rid of unnecessary expenditure, such as Arab wars, the EU contributions, billions of fund aid to India and other countries that never seem to improve as a result and an ever increasing drain of virtually uncontrolled immigration. With all that cash saved, we can start paying off debt, finance our pensions, finance our schools and finance our health service - things that are at the heart of this country.

    From the many comments on here, aren't there enough "ordinary" people who can stand for Parliament without being tarred with the "Left" or "Right" label?People with a sense of "right and wrong" - a characteristic that seems to escape career politians!

    Come the revolution when we can have a government of non-career politicians who can balance a household budget!

    r.

    Report on 19 September 2012  |  Love thisLove  5 loves
  • wiliamson
    Love rating 4
    wiliamson said

    Not only will the proposed flat rate pension not help existing pensioners, it wont help those who havent retired yet, but who retire before the increase is implemented. I am a female born in 1952. I can no longer collect my pension at 60 (the end of this year) but have to wait until I am nearly 63 - and I will still get the lower rate.

    Report on 19 September 2012  |  Love thisLove  1 love
  • grannymabe
    Love rating 1
    grannymabe said

    I'm one of those older generation women who could only work part-time in the '70's and '80's whilst bringing up children, 2 of them before HRP came in, and you needed 39, not 30 as now, years' NI contributions to get a full pension. There was no state help with child care then. I was naive and didn't realise that working part-time would condemn me to a poor retirement. No easy access to information in those days! So I would be absolutely livid if everybody else was getting a guaranteed £140pw whilst I and thousands of women of my generation would have to be satisfied with much less than the £l07 basic pension we get now, some as little as £65! Cameron certainly wouldn't get my vote unless he revised his definition of fairness.

    Report on 20 September 2012  |  Love thisLove  1 love
  • manyamickle
    Love rating 2
    manyamickle said

    Absolutely correct gransu but Ed Bowsher you are totally deluded. On the back of successive goverments who encouraged us to save for our retirement and sold the benefits of not "contracting out" of the State Pension I have always been Contracted In to the Graduated Pension / SERPS / SP2 etc. Clearly these bunch of pirating politicians do not believe in terms such as CONTRACTED IN which strongly implies there is a CONTRACT between the Goverment and the individual. I have kept my side of the contract by paying the full NI rates for 45 years, but in 2016 when I should retire they intend to steal over £100 a week - yes £5k a year from my state pension so they can share it with some workshy scrounger or even worse, prop up the pensions of those who Contracted Out and put that saving in to their private pension. Absolute thieving liars the lot of them. So much for the "we will make sure that those who work hard and contribute will not be disadvantaged" crap.

    Report on 20 September 2012  |  Love thisLove  1 love
  • Ed Bowsher
    Love rating 79
    Ed Bowsher said

    Hello everyone,

    Lots of interesting comments here....

    Re Serps: Steve Webb has said that people wouldn't lose already accumulated Serps rights even if they retired after 2015.

    Then there's the inter-generational fairness argument: i.e 'I paid NI for 45 years, younger people are only paying 30 years and will get a bigger pension, that's not fair." Yes, I can understand that. It's clearly what Cameron is afraid of.

    But let's remember, no current pensioner would lost money as a result of this. Their pensions would not be cut. The only problem would be that potentially they'd see younger retirees with bigger pensions in a few years time.

    And anyway, younger folk, such as me, will suffer in other ways. By the time I'm 80, there's not going to be enough people in the work force to pay sufficient tax to pay for any social care I may need.

    And if we could introduce this reform, it would encourage people of my generation to save.

    Then r says: "If you don't have enough money at home, you either have to earn more or spend less. Simples!!! What do our politicians do? Go into debt then greater and greater debt. What does Ed Balls says now? Borrow even more. It beggars belief that these intelligent men can't understand basic economics."

    This is going off the point on pensions, but I disagree with you about government debt. In the right circumstances, it makes complete sense for a government to borrow. Indeed borrowing can help reduce a government's debt over the long-term. At the moment, we're in the right circumstances for a government to borrow.

    Yes, it's true that governments have borrowed too much in the good times, but right now, borrowing makes sense. I used to write about this issue when I had a blog on The Motley Fool site. Unfortunately, that blog has been taken down, but I'll try and write about this again on lovemoney

    Regards,

    Ed

    Report on 20 September 2012  |  Love thisLove  0 loves
  • r
    Love rating 72
    r said

    "In the right circumstances, it makes complete sense for a government to borrow. Indeed borrowing can help reduce a government's debt over the long-term. "

    I agree that it is appropriate for governments to borrow in the right circumstances, just as it is for a company to borrow in similar circumstances. However, GB is something like 120% overborrowed compared with our GDP so I do not think now are the right circumstances to borrow even more. I know this is the left-wing rhetoric at the moment and it is also supported by Cameron & Co because borrowing is still going up (a fact not publicised very much).

    The only way any government can repay borrowing is by devaluing the currency, which is what is happening all over the western world by means of QE. This means that a pound borrowed now will be repaid with a devalued pound at some time in the future.

    We have already seen examples of this where the government introduced the Graduated Pension back in the early '70s. For every £1 extra pension contribution each week, we would get 6d (yes, 6d old pence = 2.5p) extra a week on our pension. We would all be much better of had we invested all of these extra £1 contributions - they would now be worth a heck of a lot more than 2.5p a week! A £1 note was a lot of money in those days.

    If you think that now is the right time to borrow even more, I think you are deluded. It is doing nothing more than soaking the value out of our savings and out of the future pensions that belong to our children.

    r.

    Report on 22 September 2012  |  Love thisLove  0 loves
  • Ed Bowsher
    Love rating 79
    Ed Bowsher said

    Hi r,

    I disagree.

    Yes, the government debt is way higher than I'd like. But the best way to reduce the government's deficit, and eventually its debt, is to push up economic growth. And the best way to push up growth is a fiscal stimulus which will be funded by borrowing.

    The good news is that the government can borrow extremely cheaply at the moment. So we can borrow to build infrastructure - which will provide a long-term boost to the economy thanks to better infrastructure - and provide a short-term boost because more people will have jobs. Those people will then spend more and economic growth rise thanks to the 'multiplier.'

    We could also provide a stimulus via tax cuts. I'd do both, cut taxes and more infrastructure.

    Don't get me wrong, I'm not saying that a fiscal stimulus would boost economic growth to 5% and solve all our problems. But it would help. It's certainly a better idea than Osborne's current approach.

    I also don't think a stimulus would damage savings or pensions. A fiscal stimulus could hasten the time when the base rate could go up. That would be good for savers! Same with long-term interest rates.

    I fail to see how a fiscal stimulus could hurt our children. A better economy would mean more of them could get a job when they graduated. What's wrong with that?

    Ed

    Report on 24 September 2012  |  Love thisLove  0 loves
  • r
    Love rating 72
    r said

    Hallo Ed,

    I think we will have to agree to disagree!

    Whereas Keynsian theories might have worked in times of less debt, I can't see your suggestion working now. I think the priority MUST be to reduce debt to a manageable level but this can be done in other ways as well as using austerity measures.

    If we take your suggestion to its absolute limit, we will end up with infrastructure projects (roads, housing, offices, bridges etc) covering the whole of the country. Ultimately, Keynsian theory is self-defeating. I am still of the opinion that we must balance our books for long term stability and this must be a priority.

    We can make significant changes quite quickly (a couple of years) by eliminating expenditure that we can't afford and that is unproductive. I am talking about membership of the EU, constantly getting involved in Arab wars (Afganistan, Iran, Syria etc) and aid to countries that don't need it (eg India and Pakistan) and start looking at the cost of virtually unlimited immigration. Before you have a go at me for being racist, I am not. I am, however, seriously worried about the influx of immigrants that have no intention of working here or those that do work here and then bring in extended families that need to be kept.

    It's too late now but just consider how much of our money has been spent in shoring up RBS, Barclay's and Northern Rock. In my opinion, market forces should have been allowed to prevail and those limited companies should have be allowed to fail. No doubt there would have been outcries from the shareholders but it would be a lesson to investors to select responsible companies before parting with your money; savers would have been protected by the Government (to £50,000; now £80,000). The word Limited means limited liability and is in the name for a reason.

    This is not off topic because all of these things severely impinge on our pensions, both saved and state; Brown found it necessary to tax dividends and all governments have slashed the state pension to a minimum instead of having the guts to set up a proper pension scheme where we all have persoanl pension accounts.

    A final thought: after about 80 years of government tinkering with the financial system, we are, probably, now worse off than before we had central bank control. How about government protecting the needy, such as the injured and those incapable of working, looking after the NHS, education, defence, the elderly and let market forces sort out the economy. If the failing banks had been allowed to fail, the hurt that many would have suffered would be well past us now and we would be well on the way to prosperity and a little wiser.

    r.

    Report on 25 September 2012  |  Love thisLove  0 loves
  • Ed Bowsher
    Love rating 79
    Ed Bowsher said

    Hi r,

    Yes, we'll have to agree to disagree. Shame though, I'm sure we could happily chat for hours. But other stuff has to be done...

    Ed

    Report on 27 September 2012  |  Love thisLove  0 loves
  • paultaylor77
    Love rating 1
    paultaylor77 said

    I am praying that it is scrapped. On a personal note I am due to retire in July 2015 and if it goes ahead I will be a big looser. My current pension forcast is £208 based upon basic pension, graduated pension and state second pension. I have worked all my life and built up these additional benifits and they could be snatched away as I approach the last hurdle. Surley its unfair to treat me and many other hard working people this way by "stealing" our rightful hard worked for entitlement?

    Report on 30 September 2012  |  Love thisLove  0 loves

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