What would the ordinary man in the street say if you walked up to him and told him that the Government had just taken up to £80,000 out of his wallet?
No, that’s not part of the party political broadcasts currently being shouted from the roof tops. Indeed I bet scarcely anyone hit by the change to their pension has a clue what is happening.
Worse still. I wonder how many advisers are up to speed with the full implications of all the latest reforms to the state pension, which came into force last month. Indeed, how many could put hand on heart and be confident of accurately calculating someone’s full state pension entitlement? Pretty few, I’d guess. Well, they had better wake up fast, because many of their clients’ state pension expectations have just sustained a hammer blow, with the phased removal of any salary-linking.
Anyone engaged in planning or advising individuals or companies on pension matters should recommend every employee now requests a state pension forecast as a matter of urgency.
Then they can alert their clients to the need to contribute more. Will it happen? It might, when the sun rises in the west, as the Chinese say.
So what are these changes? The first raft, and better publicised changes hit women. The age at which they will get a state pension will rise from 60 to 65 by 2020. However, another change will make it easier for them to receive a full basic state pension, when they finally qualify for one.
Anyone can now qualify for a basic state pension after making national insurance contributions for 30 years, rather than the 39 for a woman and 44 for a man, previously required.
It’s anyone’s guess whether women will be better or worse off. Some will be and some won’t, but crucially, they will either have to work longer or save more to replace the lost state pension.
Having something taken away that you didn’t know you were going to get doesn’t seem that big a deal. But it is highway robbery nevertheless
Also worth pointing out is that raising women’s pension age to 65 saved the Government considerably more than improving the terms on which it was finally paid. Overall then, women lost out, which implies a gap to be filled.
The other big gap though resulted from almost unknown changes to the second state pension, formerly called Serps (the State Earnings Related Pension), and now renamed as S2P. This could cost some employees the loss of £3,000 in retirement, which will cost £80,000 to replace out of their own pockets.
It would seem that the Government’s ultimate aim is to do away with it completely. Any link to earnings is being phased out so that we all get the same, with the longer-term intention presumably of merging S2P with the basic pension to provide a flat payment for all.
Initially, these changes only affect pension arrangements which are contracted into the state scheme, which these days most are. However, from 2012, all pensions will be required to be contracted back in with a few exceptions. Final salary schemes have been exempted from the new arrangements.
The change is significant, as the S2P, was worth up to £140 per week on top of the basic state pension for anyone earning about £40,000. The plan is that it should be capped at £80 per week, but paid at that level to all. This is being achieved in a series of steps. Last year the Government introduced a cap of £40,040 on eligible earnings. Last month, a new ceiling of £31,800 was introduced, penalising anyone earning above this level.
People do not know what they will get from the state at retirement, and find the calculations impossible. Having something taken away that you didn’t know you were going to get doesn’t seem that big a deal. But it is highway robbery nevertheless, and advisers need to get their act together, and work out how they are going to get the message across. The best place to start is by ordering those pensions forecasts immediately.
Only when state pension entitlement is taken seriously will the public fight to protect it.
Teresa Hunter is personal finance editor of Scotland on Sunday
