This piece first appeared in The Daily Telegraph on 31 December  1999
The text here may not be identical to the published text

State cuts mean going it alone

A flat-rate top up will replace SERPS

The Government intends to scrap the State Earnings Related Pension Scheme (SERPS) within a generation and replace it with a flat-rate top up pension worth less than £2500 a year after a full working life. SERPS was introduced by Barbara - now Baroness - Castle in 1978 and was supposed to match the best private pension provision. But it was watered down before it began and the last Conservative Government changed the rules twice to reduce the value of the pensions paid to almost a quarter of those originally planned. Now the new Labour Government is going to scrap it.

The Child Support, Pensions and Social Security Bill, published ten days ago, makes it clear that within a short number of years SERPS will be replaced by a flat-rate top up to the state pension which will suit only a few very low paid people. Everyone else will be expected to stake their comfort in retirement on one of the new stakeholder pensions, which begin in April 2001.

Despite generous cash incentives to leave SERPS - paid by the State from the National Insurance Contributions of everyone in work - the numbers in SERPS continues to rise. It was around 13 million last year. The traditional advice is that men under 53 and women under 46 should leave SERPS and put their contributions and the government rebate into a personal pension. Once they reach those ages they should think of moving back into SERPS. But the political uncertainty surrounding SERPS makes the ups and downs of the stock market seem almost like a safe bet. Andy Cowan, Director of independent financial adviser Aitchison and Colegrave says that the decision is not just about arithmetic.

"The growth rates in the quotes you are given are very conservative - half a percent and one and a half percent growth above inflation. So an older client who may be a little more speculative in outlook and has seen the political uncertainty around SERPS and feels that if anything SERPS will be watered down yet again, then they may still be better off in a private plan. You need a good pension provider with a good track record. What I do is review it each year. It is very important to get good advice and keep the options under review."

The death of SERPS will come in two stages. Stage 1 will change the name to State Second Pension and increase the benefits of SERPS to anyone earning less than £21,600 a year, with the biggest gains paid to those earning less than £9500. Anyone with a lower income will be counted as if it was £9500 a year. Even people unable to work at all due to disability, caring for a disabled relative or with a child under 6 will also be put in the scheme as if they were earning £9500 a year. But Stage 2 will abolish the earnings related element and Government guidance issued with the Bill make it clear that anyone with earnings over £9500 a year will be expected to join one of the new private stakeholder pension, which begin in April 2001.

"In the second stage, to be introduced when stakeholder pension schemes have become established, State Second Pension (the new name for SERPS) will become a flat rate scheme…Everyone…will be treated as if they had earnings of £9500…regardless of their actual level of earnings." The calculation of the costs of the new regime assumes "that everyone earning over £9500 has contracted out of the State Second Pension by 2030".

The current incentives to leave SERPS pay rebates into a personal pension plan. They can be as much as £39 a week for people over 48. But financial advisers say that the Government will have to increase these incentives considerably to persuade people out of the state scheme. A consultation document issued with the new Bill gives no figures for the incentives that will be on offer. Stephen Muir, marketing manager of insurer Axa Sun Life, says that makes giving advice now very difficult.

"The Government is now on record a saying it wants everyone out of SERPS eventually. If so the rebates will have to increase considerably. The pensions industry is very exasperated by the lack of figures in the consultation document issued by the Department of Social Security. Until we see some numbers questions about what people should be doing are unanswerable."

But soon it could be much easier. The present rebates are a percentage of the earnings on which National Insurance Contributions are due and range from 3.8pc for people aged 16 to 9pc for those aged 48 or more. But the new State Second Pension will be at least twice as much as SERPS for people earning £9500 a year or less. For them, that will often be much more than a personal pension or even a company scheme will pay out. So the Government is proposing to top up the pension of anyone whose company or personal pension does not match the SSP. If so, it could make leaving the state scheme a one way bet, and drive most people out of it. Until that happens advisers agree on one thing. Keep your options under review and make an annual decision on the basis of the rules about staying in or out of SERPS. There is one crumb of comfort for people close to retirement now. All SERPS pension earned to date will be honoured. But people at work from April 2002 will find they are paying into something very different indeed.

31 December 1999

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