This piece first appeared in The Daily Telegraph on 3 August 2002
The text here may not be identical to the published text

Electing to leave ourselves poor


Who would you rather trust with your money? Stockbrokers or politicians?

People who refused to take the Thatcher shilling in 1988 and opt out of the State Earnings Related Pension Scheme (SERPS) to pay into a personal pension invested on the stockmarket could be forgiven for feeling a little smug. As share prices plummet and pension pots decline, people who stuck with the State are now sitting pretty. The Daily Telegraph has learned that the market value of the maximum SERPS for someone retiring this year is around £160,000. But while the older generation has done very well, young people paying into the new State Second Pension will not get much out of it when they retire because of successive cuts in state benefits by Conservative and Labour governments.

Someone retiring this year, who had consistently earned around one and half times average male earnings and contributed to SERPS since 1978 will get a total state pension of £10,922 a year – including £6996 of SERPS – increased each year in line with inflation and guaranteed by the state. In addition, a widow or widower inherits 100% of the SERPS on the death of their spouse. Those benefits from the state are in sharp contrast to the proposals put forward two weeks ago by the Government adviser Alan Pickering to abolish both indexation and widow’s benefits to keep down the cost of company pensions.

Calculations done for The Daily Telegraph by the specialist brokers The Annuity Bureau show that it would cost £157,635 for a man aged 65 with a wife aged 62 to buy an inflation-proofed pension of £6996 with 100% benefit to his wife on death. If she bought the pension at 60 she would have to pay more - £165,952. From October this year, widows will inherit less SERPS - down progressively to 50% of the full pension. That reduces the cost of replacing SERPS to £136,767 for the 65-year-old man and £158,820 for the 60-year-old woman.

Despite the value of SERPS it actually costs very little to buy through National Insurance – much less than it costs to buy the much smaller basic state pension of £75.50 a week. To earn that, a worker has to pay 8.4% of earnings during a working life of around 40 years. In today’s terms, someone earning £30,420 a year or more will pay the maximum National Insurance contributions of £41.66 a week to get a basic state pension when they retire of £75.50 a week. But SERPS costs far less to buy, even though at its maximum SERPS is worth almost twice as much as the basic state pension. People opted in to SERPS pay extra National Insurance of just 1.6% of earnings. Someone earning £30,420 paying the maximum National Insurance contributions will pay an extra £7.93 a week and it would have taken them just 24 years to earn the maximum SERPS for someone retiring this year of £134.54 a week. No wonder insurance companies are rushing to advise people to opt back in to what is now called State Second Pension before another mis-selling scandal hits them. Of course, people who earned less than the maximum of £30,420 will earn less SERPS – but they will also have paid less in earnings-related National Insurance contributions.

But before the lucky souls approaching retirement with a good SERPS record gloat too much over their good fortune, they might ponder what their pension would have been without constant chipping away by governments motivated by the same combination of greed and fear that dominates markets.

The last Labour government changed the law so that the basic state pension rose each year in line with earnings rather than prices. Labour saw pensions as deferred pay and wanted pensioners to share in the nation’s growing wealth. But Labour lost power in 1979 before the policy had really had any effect and the new Conservative government replaced the link with earnings by a link with prices which rise more slowly. If pensions had risen with earnings, the National Pensioner’s Convention estimates the basic pension would now be £101.15 a week, over £25 above its current level.

The Thatcher government then turned its attention to SERPS. Already cut by the Labour Cabinet before it was introduced, the Conservatives cut it further. Instead of a pension of 25% of earnings in the best 20 years, it was cut to 20% of earnings throughout a person’s working life. That halved the future value of SERPS. Then, John Major’s government halved it again by reducing the value of lifetime earnings that was used in the final calculation. The generous widow’s benefits were also attacked – halving the amount of SERPS that was inherited from 100% to 50%. These changes all came into effect after New Labour was elected in 1997. But they let them stand, only delaying the cut in widow’s benefits from April 2000 to October this year.

The present Government finally abolished SERPS in April 2002, just a month before the death of its founder, Baroness Castle. In its place is the new State Second Pension (S2P), offering similar benefits to the slimmed down SERPS but with higher payments to lower paid people and new benefits for those who are too disabled to work, carers and mothers of young children. But from April 2006 Labour plans to cut S2P back completely, turning it into a flat-rate supplement to the basic state pension. Anyone born after April 1961 will then earn an extra £1 a week on their pension for each year they pay into S2P.

No wonder politicians are as little trusted as financial advisers. But there is no compensation when they mislead us into paying for something that disappears just before we need it.

3 August 2002

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