Cheers to Poorer UK State Pensions?
The state pension is changing, and both pensions minister Steve Webb and David Cameron are winners – but millions who didn't contract out of the state system look likely to lose.Nothing new to report here, America's new pension poverty is going global. And even though the UK has a decent retirement system, it's basically implementing silly policies, leaving millions to fend for themselves during their retirement years. Let them eat cat food is essentially the UK's pension policy but then again what do you expect from the Conservative boneheads running that country?
It is estimated Webb's state pension entitlement will increase by £37 a week when the complicated assortment of state pensions and top-ups are replaced in two years' time by a supposedly simpler benefit, the "single-tier pension".
That £37 a week income would cost around £50,000 to buy via an annuity, but the pensions minister will pay only an extra £6,720 in national insurance (NI) contributions for it, according to figures from actuaries Hymans Robertson.
Prime minister David Cameron is also expected to be better off, although because he is a year younger than 48-year-old Webb, he will have to pay slightly more: an estimated £7,200.
The single-tier pension, described by his government as "a new, simple state pension", goes live in April 2016. It is estimated that it will be worth £147 a week in today's money. If you reach state pension age after the new scheme starts, your pension will be based on the single-tier scheme; however, the contributions on your national insurance record under the current system will count towards your single-tier pension.
It appears that whether you'll be a winner or a loser comes down in large part to whether or not you contracted out of the state second pension and/or its predecessor, Serps.
Those with long memories will remember that back in the late 1980s, the public were offered cash "bribes" to encourage them to contract out of Serps and sign up for a personal pension. Millions did. But just a few years later, experts were saying many people would be better off by going back in to the top-up state pension.
Now, another few years on, things have reversed. Many of those who contracted out (whether through membership of a final-salary workplace scheme or because they opted out of Serps/state second pension in favour of paying into a personal pension) are on course to be quids in, because under the new regime they will be allowed to carry on building up state pension for much longer than those who stayed contracted into the state scheme.
Put simply, those who have been contracted out are less likely to have already hit the magic £147 figure, and will generally be allowed to build up the full single-tier amount, and keep their contracted-out pension as well.
By contrast, people who only have contracted-in pension will be more likely to be at, or near, the £147 limit in 2016. They will be capped at that level and will have to pay NI for years for no extra benefit. Under the current rules, they could have earned a combined pension in excess of £200.
According to the TUC, about 20 million workers, mainly employed in the private sector, are contracted into the state second pension, and the "vast majority" will receive less when they retire as a result of the changes. It says scrapping the state second pension "will mean many low and middle-income private-sector workers, particularly those several decades away from retirement, could be thousands of pounds a year worse off".
Webb and Cameron are among the winners because they have both been contracted out for large chunks of their working lives. A "contracted-in" worker of the same age as Webb will be around £26 a week worse off, because the single-tier pension will be lower than the maximum combined basic and state second pension under the current system.
Chris Noon, a partner at Hymans Robertson, says: "It's ironic that the biggest gainers are those who already have decent pensions. Those who don't currently have any private pension are, by definition, contracted into the state system, and they all lose if they have a long career. For millions, the extra pension from 'automatic enrolment' will not make up for the state pension lost."
Webb has declined to say how much better off he will be under the new system. He was eligible to join a contracted-out final salary scheme in his nine years at the Institute for Fiscal Studies, before joining the contracted-out MPs' scheme, but has declined to confirm whether he did so. Hymans Robertson's figures assume he did, but even in the unlikely event that he had not, he will still be £10,000 better off on account of his years in the MPs' scheme.
The prime minister has also declined to confirm whether he was contracted out during his six-year stint as director of corporate affairs at Carlton TV. But even if he hadn't been, his time as a member of the MPs' scheme means he, too, will be a net winner.
Pensions campaigner Ros Altmann says: "I am concerned at the lack of transparency around who the winners and losers are in this transition to single-tier pensions."
Your questions answered
When is the single-tier pension coming in? April 2016.
How is the single-tier pension calculated? Pension of around £4.21 per week is credited for every year you pay national insurance contributions (or build up carer's credits). If you reach 35 "qualifying years", you'll get the full single-tier pension, expected to be £147 in today's money (35 x £4.21 = £147). It's expected that a minimum of 10 qualifying years will be needed to qualify.
What if I've already built up more than that? In 2016 your payment record will be translated into a single amount. This is called your "foundation amount", and if it's more than £147, your state pension will be fixed at this higher amount.
What if I have less than £147? You'll be able to build on your foundation amount at the rate of £4.21 a week per year until you hit the magic £147 (or whatever the figure ends up being).
What if I don't qualify for the full amount by the time I retire? You'll be able to apply for your income to be topped up through pension credit, as happens now.
How does the current system work? Your basic state pension is based on the number of years you pay national insurance contributions or accrue credits for caring for children or those with disabilities. To get the current maximum basic state pension of £110.15 a week, you need 30 years of contributions or credits. These are your "qualifying years".
The state second pension, which replaced Serps, is paid on top. People who have contracted out and the self-employed do not accrue state second pension.
The UK is in for a major economic and financial shock in the years ahead. When their inflated real estate bubble bursts and financial markets experience another crisis, it will set them back years, and these silly pension proposals will come back to haunt its poorer citizens.
But not everyone is convinced the UK is experiencing a housing crisis. Below, Reuters reports British house prices are now 8% higher than a year ago, according to two widely watched surveys, the biggest increase in over three years. Joanna Partridge asks if the U.K. is seeing a bubble or just playing catch-up?
One economist says it's only a problem in London but I warn all you institutions falling in love with UK real estate and blowing $500 million in UK wind farms, when this British bubble bursts, it will be spectacular and very ugly. It's definitely time to short Canada and now that we exported Carney to London, it will be time to short the UK in a couple of years.