11th October 2004 - Midnight

I'm writing this article just before midnight on Monday, the 11th of October 2004 - so I have no idea what the Turner Report on Pension Reform (to be published tomorrow) will say about how the UK is going to tackle Pensions, and the impending result of the 'baby boom' during the 50's, in the years to come. The only leak of what might be in the report was that Britons are saving £57 billion a year too little for their retirement.

At age 56 myself, a 'baby boomer' of the late 40's, and an ex-Independent Financial Adviser (IFA) of 27 years, I have a definite personal interest in this subject!!

Don't worry, spend, spend and be happy?

Just like us, when we were in our 20's saying, "We don't have to worry about saving for retirement - it's too far off", so will the Government discover it's done too little to late with reforming Pension provision in the UK. Let's face it, we're living far longer than ever before and more of us are going to be poverty stricken in retirement - whenever that's supposed to be. The idea of retiring at age 65 and hoping to live in the style we've become accustomed to is about to be dropped upon us in a massive bombshell. We're probably about to follow Sir Norman Wisdom who today announced he was going to finally 'retire' at the age of 90 years - and he most likely didn't even need the extra income he's earned over the past 25 years!

Work till you drop

Ideally, there's nothing wrong with working past the age of retirement, but most who do so don't always do it for the money; they do it because they enjoy(ed) their chosen profession and simply wish to continue. My father, an accountant, worked right up until he was 85! Now, if you're self-employed that's fine. But what about the millions of 'employed' workers on PAYE who all of a sudden find they're put out to grass at age 65? If they were a construction worker could they really be expected to climb ladders and lift heavy objects at age 70? Of course not! Even with anti-age discrimination coming in 2006, employers will still find a reason for not hiring the over 60's - why should they when they can hire youngsters on the minimum wage? And who's going to train a 65 years old construction worker to operate a computer or some other hi-tech device? Pie in the sky stuff.

After working for 40 or 45 years most people who reach retirement in good health may simply want to put their feet up, pursue a hobby, take long sunny holidays or just potter about their house. Don't they deserve it after working for so many years? Unfortunately, over around 2 million pensioners out of the 11 million pensioners today find they're living in dire poverty - and it's going to get worse. So who's to blame?

State Pension, or a State of Poverty?

If you're a retired single pensioner in the UK you're expected to live on a State Pension of £79.60 per week. If you're a married couple and have full National Insurance contributions you're expected to live on £127.25 a week. Worse of all, if you have not paid sufficient N.I. contributions you may get a partial pension or you may not receive a pension at all. If you are not entitled to a full Basic Pension you may receive a reduced amount. The State Pension is not universal, and if you don't qualify for the full amount you're forced to fill in a myriad of forms in order to receive the Pension Credit - which will still leave you in a state of poverty, regardless.

Earnings link v Inflation link

Thanks to Margaret Thatcher in 1980 who abolished the pensions 'earnings link', and because the State Pension since then has been calculated on the Inflation Rate, pensioners have had to rely on private savings, a company or private pension to make up the difference. If the earnings link had not been ended in 1980, a single person would currently receive a basic State Pension of £109.00 a week and a couple would get £174.00 a week.

How does our State Pension compare with the rest of Europe?

The UK currently contributes about 6% of gross domestic product to pensions, compared with around 11% in the rest of Europe. In Germany for instance, the State Pension is double what pensioners receive in the UK. In Denmark a single pensioner can expect to receive £188.95 a week whilst a couple live in relative wealth on a £232.56 a week Danish State Pension. It's not to say that these countries can sustain this level of pension provision/income in the future, but it clearly illustrates how pensioners in the UK are being royally shafted and why many are forced into poverty.

'Young too late, old too soon'

When I was selling Registered Retirement Savings Plans (RRSP's) in Canada during the 70's, and Pension Plans in the UK during the mid-80's, the hardest part of my job was convincing young people that they needed to save for their retirement NOW. Try explaining to a 20 year old that they must to start saving today in order to provide a decent standard of living for the same, but older person 45 years from now! If I was able to convince a 20 year old to start saving NOW, even a modest monthly premium of £100 a month increasing at 2.5% per annum would be insufficient to provide a decent pension at age 65! (see: Pension Calculator) He or she (women need pensions that pay more, because they live longer!) have to invest well over £100 a week increasing at 2.5% per annum for 45 years to make a significant dent towards a happy retirement. Anyone over the age of forty (it's really too late!) who invests just £100 per month, in my opinion, is basically wasting their time.

Blame the Government and the Pensions Industry

During the early 90's Robert Maxwell used his firms company pension fund to finance his own business interests. Thousands of employees lost their pensions - and their jobs. Since the Maxwell affair, UK pension law was supposed to have been tightened up to protect the rights of members of company pension schemes. Under the hastily imposed Pensions Act of 1995, trustees cannot invest more than 5% of the pension fund into the business of the sponsoring employer, and they must produce regular reports on the status and performance of the pension fund. It is now clear that the then Conservative Government forgot several important things along the way! Employees are still losing their pensions because if an employer decides to wind-up the scheme or goes bankrupt, they can also lose much, if not all of their pension assets. There is no guarantee that the money an employee (plus, any employer contributions) invested for 40 years, often giving him or her two-thirds of Final Salary, will be there when they retire. Thanks to woefully inadequate legislation, over 40,000 people in the UK are likely to receive almost no work-related pension from their employers. Tens of thousands more risk the same fate. This is a National Scandal - a Rip-Off of the highest degree!!

Although the Government is introducing a 'so-called' Pension Protection scheme, it doesn't help the 40,000 workers who have already been shafted. It also doesn't guarantee that an employer can't wind-up a final salary scheme (defined benefit), in favour of the more risky stock-market based money-purchase scheme (defined contribution). Many employers are doing exactly this because they save money and administration costs in doing so. The only final-salary schemes that will be around in the future will probably be the Police, Fire, etc., and Civil Servants - and of course, the Prime Minister and all his MP's in Parliament.

Of course, I forgot to mention that in his first Budget in 1997 Gordon Brown imposed an Advanced Corporation Tax which has resulted in pension funds paying about £5 billion a year more in tax on dividends - so where's that £35 billion pounds gone Gordon? (notwithstanding the 66 stealth tax rises since 1997!) Certainly not to pensioners!! And what about the Equitable Life scandal, various stock market 'crashes' and 'blips' during the 80's & 90's, sky high Council tax bills that pensioners struggle to pay. Annuities and their rates are also a joke. During periods of low interest rates they are low, and when your spouse dies you may only get half of it to live on!!

Is there a solution?

Apart from getting rid of the 'damaging-duo' of Blair and Brown, instead of pouring your hard earned money into Pensions, I'd start investing in rental property and perhaps even antiques. Ever seen a retired poor thin starved landlord or antique dealer? I haven't. But seriously, in my opinion, both the Government and the Pensions industry shouldn't be profiting from any tax on Pension funds or taking vast profits from Pension investments/charges. Pensions should become a 'social funding cooperative', run by local cooperative banks in association with trustees and local businesses. That way, and only that way can pensions remain protected, employees can move from one job to another (take a break) and their Pension remains intact - they could even use part of the fund at anytime (tax-free) to help buy a house or rental property.

National Insurance contributions are nothing more than 'hidden' taxation. Why not take the 11% NIC that the employee pays, and the 12.8% the employer pays and direct these (or lesser) amounts 'tax-free' into a 'social funding cooperative'. If we were investing almost 25% of our income 'privately' into a pool of money, then there would be more than enough for us and others coming up to retirement! In order to supplement the 'loss' of NI funds that (we hope) were being directed to the NHS, the Government should help create a NHS funding scheme and we all pay 1% of our gross income - but direct this money to our local NHS hospitals, and NOT the Government.

To jog my theory into practice, the Government would also need to scrap Inheritance Tax - many previously modestly priced properties are now falling foul of this insidious tax. Get rid of Stamp Duty - help people on the ladder to own their first property - and an investment for their future - and old age. Get rid of all tax on all savings products thus encouraging people to save for their futures. And scrap Capital Gains tax on modest rental property when it's sold off. Raise the income tax band to say, £8,000 thus taking over 2 million poorly paid wage earners and 3 million pensioners out of paying any income tax at all. After all, the poor would STILL pay tax - it's called VAT - plus a myriad of stealth taxes, including of course, a proportion of Council tax!!

To help replace some of these 'lost' tax revenues, why not impose a higher say 50% Corporation Tax on Bank Profits in exchange for some the tax savings I've suggested! This 'Robin Hood' approach could really work if any UK Government were bold enough to try it.

Imagine this also. Wouldn't it be nice if the Government sent us all an itemised annual statement showing us exactly where all our taxes go, defining each tax such as road tax, VAT, income tax, corporate tax, NIC, all stealth tax revenues, etc., etc?

We need some radical thinking in this country if we're to solve the Pensions Timebomb - but will it happen? I doubt it.