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The great British pension swindle

The business and economics sections of the press have been dominated by the problems of private pensions in recent months. Once a dull-as-ditchwater subject about which journalists and the public showed little interest, the state of our retirement nest eggs is now a major policy issue. Hundreds of blue-chip British firms have shut pension plans to new staff, such as those which offer to pay a benefit linked to final salary at retirement age. Some workers even suffered the torment of losing all their accumulated pension when their sponsoring firms went to the wall. All in all, it has been an alarming time for those dreaming of retirement.

But to read the media, you would hardly know that the biggest pension scandal of all is in the state system. James Bartholomew, writing in the Sunday Telegraph, pens a scorching denunciation of state pensions. He points out that we are told by the experts that retirement ages will have to rise, and, to be fair, improved life expectancy (surely a triumph of health and living standards rather than a problem) makes that a sensible option. But taxpayers who paid their national “insurance” contributions are being told that the state is welshing on its side of the bargain. If a private business operated on the same basis as the government did with tax-funded pensions, the directors would be sent to jail for mis-selling on an epic scale.

Reform of our creaking state pensions system remains one of the most intractable public policy issues of the age. The destination — a system of privately held accounts may be obvious to a free market zealot like me, but getting there is going to be very, very hard unless politicians have the sense, and the courage, to scrap all taxes on savings income and capital gains to make widespread long term private saving a reality.

The present state of affairs cannot endure.

15 comments to The great British pension swindle

  • Rob Read

    Don’t get them reforming pensions! Gordon “prudence” Brown is after your 25% tax free cash (which is the ONLY reason to get a pension). Also expect to see it “means tested” so those that defered the most consumption (saved) will be punished.

    Pensions should be the simplest savings account in the world, but most admin charges will kill your yield or bankrupt the company! I work in Pensions Admin and Gordon’s constant “simplifications” (meddling) are my companies vast extra revenue!

    To save for the future with the most choice and least charges I suggest going the Internet SIPP route and remember to transfer out of any funds you have lying around from previous employers. You will also soon be able to put your BTL property in a SIPP, which might be good to remember if the housing goes “dot com” for all you contrarian investors.

  • D Anghelone

    US corporations, including the one from which I retired, have been going from their standard pension plans to Cash Balance Pension Plans. The change is much like a privitization of Social Security. The change has been accompanied by much consternation among the plan members but the Cash Balance plans are inherently fully-funded and quite liberating in that they don’t tie a worker to a company for fear of losing accumulated retirement credits.

  • D Anghelone

    Or “privatization.” Something like that.

  • Julian Morrison

    I think the problem’s mis-framed, and I doubt private pensions will work either. The real problem is this idea that there’s some magic age, after which a person should be kicked out of their job and paid by somebody else to goof off while they wait to die.

    Nowadays if you retire at 60, you could plausibly still have 30 years of life ahead of you. Soon enough you could have another 60. When life extension (see transhumanist thread below) hits “escape velocity” sometime in the next few decades, you could effectively expect to live forever.

    There is no business model that could make that much freeloading pay.

  • The Wobbly Guy

    The trick lies not in extending the lifespan, but rather, extending the period of youth. If we can remain fit and active to our 80s or 90s(looking and feeling like 40 year olds), why retire at 60?

    Okay, I’m being awfully optimistic here…

    TWG

  • Mark Ellott

    It became obvious about ten years ago that the state pension system was on the point of imploding. Demographics made it obvious anyway – an ageing population and a smaller, younger workforce footing the bill. The answer is to plan early and be imaginative about how you invest. Being self-employed, I probably won’t retire in the conventional sense, but will continue to generate an income well into retirement age. I think of my mother-in-law who in her late seventies is still running her own small antiques business and doing rather nicely…

  • Daveon

    I’m with Mark, although frankly, if I had the money I’d retire this morning ;)

    I think people need to plan for longer and more varied lives – transhumanism brings a number of issues along with it, living longer is, IMO, a minor part, there’s a lot more to it than that. But assuming that there are no Vingean Singularities or the like in the next few decades, a steady plan of saving and structured work is the way ahead. Being self employed or able to become self employed and do consulting etc… is a perfect answer. Property income is a nice one too.

    As an old collegue about to retire at 50 said to me once; “please god, grant me another stock market boom, I promise not to waste this one…”

  • toolkien

    There is no business model that could make that much freeloading pay.

    Why is it freeloading? Aren’t pension plans simply investments? If a person has ‘saved’ instead of consumed to a point where they do not have to work I think is a level we’d all like to get to. Better yet is to have enough saved so that we can live on the corpus and never have to erode our savings. That is the idea of capital in a nutshell, having the capital work for you instead. That is the reward for being hard working for a period of time, being judicious with the proceeds, and managing it from there. Calling it freeloading seems wrong.

    Of course when the State is involved, the above is simply an ideal. Without the level of transfer we experience, my wife and I would be well able to save enough and retire at a reasonable age (say 62) and have the money grow to afford a comfortable living while staying ahead of inflation. But that’s not the way of it. I must pay for others to live comfortably and Hope that others will do the same for me. It is not likely they will and I will be out. In a ponzi scheme someone has to lose out, and I think it will be me and my generation.

  • Julian Morrison

    Hmm, toolkien, you’re right, I hadn’t thought of pensions in terms of “invest and live off the interest”.

    That’s not what most private pension schemes are though, right now as I understand it they’re mostly insurance-style gambles that the sum of the premiums will exceed the sum of the annuity. Gambles that are guaranteed to go bust as lifespans increase.

    Hmm, so, thinking about things, it’s liklier that more people will be able to retire (or at least, have their free choice of work) in the way you describe, on the return from investment, since they’ll get more time in which to build it up. Provided there can be a way to stop the state from draining it away!

  • Andy

    Toolkien:
    Very few pension plans are really investments. Many are just a lien on the future; for example, the price of a new Ford car here in the US has roughly $3000 that goes directly into pension expenses. This is a staggering number when you think about it. Mind you, this is not preparing to fund the pension of future retirees, this is to keep the commitments to the current crop of retirees/survivors.

  • Dave

    Pension savings are an investment, but under the current “system” the lump sum you normally end up with isn’t going to be all that much use. What happens then is you take a gamble with an insurance company, you gamble on living, they gamble on you dying – ah the life of an actuary eh?

    Ideally you will save enough in your life to live well off the interest and your savings – that’s hardly a given and not necessarily possible. Even in a zero taxation state the chances of people saving “enough” to retire in their 60′s and live comfortably for several decades is quite low, especially at current interest rates. You could make more on your investment, but you’d also need to put your money at serious risk, like it would have been in typical trackers in the last couple of years.

    Based on some “back of the envelope” stuff, and not allowing for inflation, for the average person, they’d be needing to put away 1000+ a month for 30 years to have enough case to achieve that.

    Buying property when you can afford it over the same period would be a better bet, but not necessarily practical for everybody.

    I’m not saying it can’t be done, but that it’s not necessarily straight forward, even if you have your tax income to spend.

  • The Wobbly Guy

    My country’s government is already encouraging every person to consider their financial future, and start planning once they start working! When I walked out of university today after collecting my graduation gown, there were at least 3 people waiting with financial planning advice. How much to save per year, accounting for inflation, taxation, CPF, medical bonuses, the works.

    Then there’s my parents, my insurance agent, the bank, the CPF board, all in my ear… Jeez…

    My father is now retired, and he’s living off his CPF savings, and whatever he gets from his stocks. We’re not rich, but I calculate that at my family’s current frugal(but comfortable!) spendings, and my impending entry into the workforce to contribute a bit to the household expenses, he’ll have enough for at least 2 decades. If we sell off our flat as a last resort, we’ll have more money than we know what to do with. A good argument for compulsory private savings.

    Regarding the Ford price thingy, I once heard my human resource lecturer comment that General Motors would have been making a tremendous profit if not for the pensions, which cause them to barely break even.

    TWG

  • Bob Dacron

    A state pension is freeloading. Why should my inheritance contribute to the wretched elderly of today just because they never had the foresight to save a percentage of their income during their working lives?

    A lot of them probably never worked pre retirement age – so my money has been paying for them all of their life.

    Then Gordon Brown comes along and tells me there isn’t enough for me to have a state handout in retirement and taxes a big chunk of what he does give me.

    Sometimes I wish I’d let my brother take some of the inheritance – then I could be penniless and live for free on a council estate paid for with housing benefit and I could get a nice fat cheque from the government every week.

    Other people make me sick. They have no right to take MY MONEY.

  • Richard Cook

    Bob:

    Man, you’ve got to knock off the caffein. Ever seen the movie “Network”? Are you “mad as hell”?

  • Bob Dacron

    Only when other people are taking MY MONEY!

    If there are 1 million more people working in the UK since 1997, we have the lowest inflation for 20 years and the longest period of sustained growth for 200 years how come they still haven’t given me a tax cut?

    If there is record low unemployment then surely Blair is paying less benefit and getting more tax income? I wanna tax cut – but instead they waste MY money by employing more doctors in their NHS, more police officers interfering in my business, and trying to put Iraq and Afghanistan to right.

    Did you know they wasted more money by increasing overseas aid by almost double. The empire was supposed to help us NOT THEM. I pay for enough leeches in my country without paying for leeches worldwide.