Pensions reform under the Coalition

The Coalition has introduced reforms to state and private pensions they claim will make the system fairer and easier to understand and administer.

As life expectancy increases, government spending on pensions also rises. Ian Duncan Smith, Work and Pensions Secretary, has introduced a series of pensions reforms. Before looking at the details it is important to note state pensions currently account for 21% of government spending. It is feared, as life expectancy grows, this figure will rise and become unsustainable. Another thing that people are concerned about is mis sold pensions. So the government’s general approach has been to increase the age for state pensions, simplify the system and encourage private pensions.

The Treasury, headed by Chancellor George Osborne, argues that these pensions reforms will save an estimated £9bn a year. These changes will affect around 40 million people of working age according to the BBC.

A Brief summary of the new state pension:

  • Begins in April 2016
  • Need to have worked for 35 years of National Insurance Contributions for full amount
  • Worth £144 flat rate week at current prices (replacing an old system of primary and ‘top-up’ payments.
  • Not means tested, unlike the ‘top-up’ element of the old system
  • The state pension age for men is now due to rise from 65 to 66 from 2020, and to 68 by 2046. Women will move to a state pension age of 66 a few years after men.

‘Triple lock’ guarantee

The Coalition has introduced a ‘triple lock’ guarantee for pensions. This ensures the state pension goes up by whichever is higher – inflation, wages or 2.5%. The Conservatives, in the Thatcher years, broke the link between pensions and earnings and Labour famously increased pensions one year by 75p. Cameron has said that it was “fair” to prioritise pensions even at a time when benefits for younger people were being slashed. The guarantee will cost £45 billion over the next 15 years. The ‘grey vote’ (older people) is a potent force in politics and so the Conservatives are arguably helping those most likely to vote, and vote Conservative. Cameron though has stated that he has set out these pension reforms with the intention that “people who have worked hard, who have done the right thing’ will be rewarded. Since its introduction, the triple lock meant the basic state pension rose by 5.2% in 2012, or £5.30 a week – the largest cash rise ever seen. In April 2013, it rose by £2.70 to £110.15 a week – a rise of 2.5%, which was higher than either earnings or inflation.

Increase in the state pension age

Another reform under the Coalition is the increase in pension age. George Osborne said the state pension age will start rising to 67 for both men and women in 2026. It will affect millions of people in their late forties and early fifties. In his 2012 Budget George Osborne confirmed that the Government will use an Office for Budget Responsibility report to create a solid link between the state pension age and rising life expectancy. Therefore those in their early 20s now have to wait until they’re at least 70 before they can take their state pension. Moreover the government has ended the rules requiring compulsory annuitisation at 65, meaning elderly people will no longer be forced to leave their job at the age of 65.

Changes to private pensions: Annuity

The idea behind annuity is that an allowance is given to the pensioner based on their private pension savings from an insurance company. In other words it is like staged ‘pocketmoney’ from their pensions savings in order to last the entire retirement. That was the pension system under Labour. The changes that will be brought in from April 2015, will mean that pensioners will now have entire access to their pot of pension savings. The Coalition argues that pensioners should have freedom to spend their savings as ‘it is their money’ (Chancellor, George Osborne). However there is a danger that pensioners could exhaust their savings before they die, having to then rely on the state or fall into poverty. Another risk is that pensioners may be targeted by fraudsters. The Government has even predicted that these pension reforms may possibly generate higher tax receipts (around £1.2 billion) as pensioners pay more income tax and spend more. These are only predictions but it does suggest that the Coalition is attempting to stimulate growth in the economy.

Changes to private workplace pensions – The other change to private pensions is to make it compulsory on employers to opt workers into workplace pensions. Since April (2014), workers would have to opt-out of schemes. The idea is to encourage private pensions. Private employees would still receive the flat-rate state pension but could also have a private pension.

What is said about these changes?

The Coalition’s pensions reforms has been praised by AgeUK as a simplification to the system, which is in line with the government’s overarching ethos of creating a more simplified benefits system. Many people will gain as a result of these pension changes, around 85,000 women will qualify for the new pension reforms. But those who currently pay in to a second state pension – which is being abolished – will lose out. Ed Miliband, leader of the opposition, argues that the Coalition is delivering ‘more of the same’ insubstantial legislation. Labour has backed the pension reforms on its ‘principle’ but has not promised to carry them through if they were in government. The Coalition argues that these changes are the ‘biggest transformation in our pensions system since its inception’.

Yllka Krasniqi

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