Redistribution, Redistribution, Redistribution…
Hmm! Yesterday’s BeeLine went down well (Too Rich to be Poor; Too Poor to be Rich). In it I pointed out that the redistribution of State Second Pension (S2P) future entitlements will probably be the main driver of increased pensions for the Government’s so-called ‘target market’ of low to medium earners. That it will also lead to some ‘collateral damage’ to middling earners’ future S2P benefits is also the case, but is not widely appreciated.
Understandable, I guess, but important nonetheless.
To help illustrate the point I’ve re-jigged the table from my earlier BeeLine (Personal Account Sales Aid) to show the ‘replacement rates’ the Government anticipates will apply following the reforms to the Basic State Pension and the State Second Pension (S2P). A replacement rate in this context is the amount of pension produced, in this case from the two State pensions, when compared to the level of earnings just before retirement. For example a 72% replacement rate for someone earning £10,000 pa would mean they could expect to receive a pension of £7,200 a year in retirement (in today’s terms).
The re-jigged table shows people with full entitlements from both the Basic Pension and S2P with annual earnings ranging from £10,000 to £25,000 and the expected replacement rates due to the changes to the State pensions and ignoring any private savings etc.
Annual Earnings Replacement Rate Annual Pension
£10,000 84% £8,400
£15,000 56% £8,400
£20,000 43% £8,600
£25,000 35% £8,750
Now, that’s a straight extrapolation of the stuff in the table (from Hansard) that was printed in the earlier BeeLine back in July. The figures may be a bit crude because of that, but it demonstrates, I think, that the combination of the Basic Pension and S2P as time goes on will be flat-rate and redistributive; in effect the total State Pension you’ll get won’t relate to the level of contribution you make. Middling earners won’t get additional pensions from the State Pension system through having paid more in National Insurance Contributions than lower earners; in fact percentage-wise they'll get less.
Looking at the data in the original table gives us the additional replacement rate (to those shown above) that a forty-year persistent saver in Personal Accounts can expect to achieve. (Forty years of persistent saving in a system where saving is voluntary, by the way, is some trick to pull off.)
For someone on £10,000 a year the increase due to forty years of persistent saving would be 8%, or £800 a year extra pension.
For someone on £15,000 a year the increase due to forty years of persistent saving would be 11%, or £1,650 a year extra pension.
For someone on £20,000 a year the increase due to forty years of persistent saving would be 12%, or £2,400 a year extra pension.
For someone on £25,000 a year the increase due to forty years of persistent saving would be 13%, or £3,250 a year extra pension.
For the people in the ‘target market’ for saving in Personal Accounts it seems the real increase in pension value is already there for them through the structural changes and redistribution inherent in them. For them Personal Accounts savings are really the icing on the cake replacement rate-wise. For middle-earners, on the other hand, the Personal Accounts pensions seem more significant to me as they will be effectively replacing the ‘lost’ cake (that will happen as a result of the changes to S2P) as well as putting some icing on the top.
19 August 2008
Source: Lords Hansard debate 30 July 2008.
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