This piece first appeared in The Daily Telegraph on 6 February 1999
The text here may not be identical to the published text

When it may pay to let the good times roll

You may be wasting your cash unless you build up a six figure sum

People who save less than £100,000 towards their retirement could be wasting their money. If they save less than that, the pension they get may not take their total income above the limit which the Government now guarantees for everyone from the age of 60.

In the week that the Government has come up with yet another pension - there are now a dozen different ways to save for your retirement - the Liberal Democrat MP Steve Webb has revealed figures which show that someone retiring this year will need a to have saved up a lump-sum pension pot of more than £40,000 to buy a pension which would leave them better off than if they relied on state guaranteed means-tessted benefits.

Figures obtained by Mr Webb, who is the Liberal Democrat pensions spokesman in the House of Commons, show that from April every pensioner will get a guaranteed of an income of £75 a week (£116.60 for a couple) - £8.25 on top of the basic state retirement pension (£9.90 for a couple). In addition, if their income is at that level of below, they get most or all of their council tax and rent paid as well as an extra £30 towards their fuel costs and cheaper dental care. Altogether, those items are worth on average about £2900 a year on top of the retirement pension. To generate that sort of an income for life, indexed against inflation, would require buying an annuity with a lump-sum of around £41,000, claims Mr Webb.

And the figures will get worse as time passes. The £41,000 lump-sum is in terms of today's money. Someone planning ahead for retirement in 20 years time will not only have to take price inflation into account, they will have to consider that the Government intends to increase the amount of income it guarantees to pensioners in line with earnings rather than prices.

In its Green Paper Partnership in Pensions published before Christmas it said

"Our long-term aim is that the new minimum income guarantee should rise in line with earnings so that all pensioners can share in the rising prosperity of the nation."

If the Government meets that aim and earnings continue to grow at around 4.5% a year, that will turn the £40,000 today into nearly £99,000 in 20 years time. So someone in their forties will have to generate a pension pot well into six figures to be substantially better off than relying on the state.

When social security secretary Alistair Darling announced his new version of the stakeholder pension this week he seemed oblivious to the conflict with his promise last year to provide everyone aged 60 with a minimum income guarantee of at least £75 a year. He told Radio 5 Live on Wednesday morning

"One of our reasons for being concerned is that at the moment about one person in three now working is going to retire dependent on benefits and that isn't good enough. Private pensions are not particularly suitable for people on medium or low incomes...we are announcing today the alternative of building up your own personal account where you can invest in unit trusts, that is tax favoured, you can build up your savings, it's suitable for people who move around between many jobs in their lifetime. What we're doing is giving more flexibility and more options so that nobody has got any excuse for not saving for their retirement."

But the new figures show that some people on medium or low earnings who are able to save only modestly for their pension have every reason not to bother.

Steve Webb told The Daily Telegraph

"If you are going to save, there is no point in acquiring £20,000 or £30,000 because the income it generates just comes straight off your means-tested benefits and leaves you no better off. You'd have deprived yourself for years to save for a pension pot. But if you saved £41,000, you’d understandably feel rather aggrieved if you were no better off. There is an essential conflict between a Government which on the one hand says it wants to encourage people to save and on the other denies benefits to people who have saved. But that is the consequence of the Government's long-term strategy which is to make means-testing a central part of the system."

Steve Webb does not want to discourage people from saving for their retirement. But he believes that the only way of making it worthwhile to save rather than spend money on that foreign holiday or new car is to boost the basic retirement pension so that any private pension is paid on top of that rather than instead of a means-tested minimum guaranteed income.

"The only way of avoiding this over-dependence on means-testing is making the basic pension worthwhile particularly for older pensioners where most of the poverty is. If that became a permanent feature say at 75, then they would be guaranteed a basic income which they could build on. They might have savings to tide them over the first ten years but that would make sure they had enough for the next 20 or 30 years as well."

6 February 1999

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