Money
Paul Lewis on the web
Pensions plan problem
At the moment about seven million people in work do not pay into a pension apart from the state pension. The Government is setting up a new National Pension Savings Scheme to make sure they do by (a) automatically enrolling them in the scheme into which they will put 5% of their gross pay and (b) compelling employers to pay at least 3% of their gross pay into that scheme.
The new system will not start until April 2012 and the employer's contribution will be phased in so will not reach 3% until at least April 2014 - more than seven years from now and 12 years since the Government set up the Commission on whose work it is based.
Considering all this work and thought - or at least time - there are two major problems with the proposals from the Government.
First, for people on lower incomes it may not be worthwhile to save up for a pension, as their gain will be relatively small. At the moment half those over 60 are entitled to claim a means-tested top up to their pension called pension credit. And a similar number can claim means-tested help with their council tax. Even when the system has been working for 25 years, in 2040 the Government says one in three people over 65 will be entitled to claim means-tested help. Losing those means-tested benefits is like a tax - in this case cutting their income by 60p for every extra £1 from their pension. Some will lose 100%. Hardly an incentive to save.
Second, the contribution from employers is too small. Decent pensions which are a proportion of your pay cost employers around 16.5% of pay. Many have traded down to the less costly funded schemes with no guaranteed pension into which they pay less than half as much - an average of around 7.5% of pay. The new scheme more than halves the employer's contribution again to 3% of pay. And the temptation of many employers who already pay 7.5% into a scheme will be to replace their scheme with the new one, cutting their contributions to 3%.
