June 11, 2007
That New Pension Plan
Not looking good:
Research commissioned by the EOC and carried out by the Pensions Policy Institute showed that some groups, such as women with small pension savings and without full state pensions, would not be £1 better off for every £1 they put into Personal Accounts.
That was because their pension savings would reduce entitlements to means-tested benefits they could have claimed had they not saved.
In the private sector, advising people into a plan which you know will make them worse off would be called pensions mis-selling. In the public, forcing them into one is regarded as a solution.
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These "personal accounts" are shit anyway, here's my letter in the FT this January.
The planned national pensions accounts will probably worsen the financial position of exactly those it is intended to help, to wit, "younger people and women with lower earnings" (FT, 16 January 2007).
Economically rational younger people should be paying off student loans, saving up a deposit or paying off their mortgage in priority to
saving for retirement and so will choose to opt out. Women with lower earnings need every penny and so will be forced to opt out.
A compulsory contribution by employers is tantamount to an additional payroll tax and so will depress long-run headline earnings. Stephen
Haddrill of the ABI suggests that "the taxpayer might meet some of the set-up costs". Given that the aim of the accounts is to reduce the tax
burden on those who opt in, the additional tax burden must be intended to fall on those who opt out.
So there we have it. The net incomes of "younger people and women with lower earnings" will suffer a double-hit; they will have even less money now; and much less in future.
Posted by: Mark Wadsworth | Jun 11, 2007 10:25:13 AM
This is interesting:
"Steve Bee, head of pensions strategy at Scottish Life , said: “This really is the next pensions scandal . It is not much to ask that people should be guaranteed that every £1 they put into the Personal Account will be worth at least £1 to them."
I don't know about Scottish Life, but I have a pension with Standard Life, and I imagine its similar, and every £1 I pay into the pension does not give me a something worth £1 in that pension.
Posted by: Matthew | Jun 11, 2007 12:41:43 PM
"rational younger people should be paying off student loans, saving up a deposit or paying off their mortgage in priority to
saving for retirement"
Why? A student loan is at 0% real interest rates, a mortgage is somewhere around 3% real interest rates, but equities grow at something more like 5% above inflation.
Secondly, each £1 of post-tax money used to pay off debts has to end up worth more than £1.28 of pension money (assuming a basic rate taxpayer). At the relative growth rates above, this is unlikely to happen.
Thus an economically rational person should pay off debts at the slowest rate and invest the surplus in a pension.
"I don't know about Scottish Life, but I have a pension with Standard Life, and I imagine its similar, and every £1 I pay into the pension does not give me a something worth £1 in that pension."
The pensions industry, particularly pre-1997 (i.e. pre stakeholder rules) has a lot to answer for. The absolute rip-off charges for tracker funds (I have a friend who is still being charged 2% for a FTSE tracker in his pension!) is particularly galling.
But just to give you some good news: (one of) my money-purchase schemes is running at 89% up on the money contributed, which given that most of it was paid in at 40% via a salary sacrifice (hence employers NI went in too) that means that for every £1 from my pocket I have £3.56 in my pension fund.
Posted by: Kay Tie | Jun 11, 2007 5:46:04 PM
Kay Tie, you confuse "Student Loans" where the interest rate = RPI with "student loans" i.e. the shedload that students owe the bank.
Equities grow at 5% above inflation do they? Guaranteed, is that? Send me a link and tell me how to buy "equities"!
Yeah, like house prices have beaten inflation by 5% over the last ten years, I recommend you go out and buy as many houses as you can ... now!
Nowhere does my FT letter dispute that higher rate taxpayers will end up better off by contributing into a pension fund, I was talking quite specifically about "younger people and women with lower earnings".
Posted by: Mark Wadsworth | Jun 11, 2007 10:44:46 PM