We need to preach beyond the converted
I DONT KNOW if you know it or not, but the Department for Work and Pensions (DWP) has recently published its five-year strategy. I mention it because, quite apart from the reassurance of knowing the DWP has a strategy, it details exactly how the voluntary deferral of the basic state pension (BSP) will work in practice.
Changes to what we can do when we defer taking the BSP is something you may remember as one of the reforms set out in the Pensions Act 2004, which will come in from April this year. For the first time, people will now be able to get the value of the deferred pension either as an increased pension payable from a later date, or as a lump sum. This will give many older people in the future a real chance of putting together sizeable piles of cash which, of course, could come in quite handy later in life. To put some scale on that, according to the DWP, the average person who chooses to defer their BSP for five years would get a taxable wedge of something like £20,000 -£30,000 to sail off into the sunset with. And anyone who can live without the basic state pension for 10 years could get a cash sum close to £80,000, a sizeable lump sum. Also remember, of course, that it's not necessary to carry on working in order to defer drawing the BSP.
Government statistics show that over a million people have already chosen to carry on working past their state pension age and one of the aims of such a reform is to recognise this and add extra encouragement to others considering it. I'm not sure whether it's true that people are working on for the love of it or not, but a recent report from the Institute of Directors (IoD) calling for an end to mandatory retirement ages seemed to agree with this. Indeed, the IoD reports that most employers expect the average effective age of retirement to increase over the next two decades. The effective average retirement ages today are 64 for men and 61 for women and only 20% of the employers surveyed thought that would remain the case in the future.
For my part I see this as yet another interesting option that is now on the table for reasonably well-off people with good private pensions to defer taking their state pension for a while and put together a cash sum instead. That is a good option in itself for loads of reasons, as well as a good reason for advisers to talk more widely about their clients' pension options in future. Some people will now be able to look on their state pension entitlement as just another financial asset they have control over to put together their own individually tailored retirement package. I like the way future pensions are becoming more and more flexible and can be used in individual ways by individuals. That's much better than the nanny-state idea that we are all the same and all require an income stream from our savings through the national insurance scheme once we hit our mid-sixties. What I don't like, though, is the way we seem to be rushing headlong into a future where we will have a polarised retired population. If things continue as they are today, half the current workforce will have a comfortable retirement with plenty of decent choices attached, but the other half will almost certainly be entirely dependent on means-tested handouts from the state. The ability to defer taking the basic pension will be of little use to people who do not have other retirement savings.
This is the real pension crisis that confronts us I think. And it is why so many people are disappointed that this enormous raft of so-called reforms going through at the moment following last year's Pensions and Finance Acts contains nothing to help spread the pension saving habit to the millions of people at work today who have no pension savings at all. The stakeholder initiative that seemed so important to our government just a few years ago is now looking like yesterday's fad already. It's become the awkward relative that we try not to talk about if we can help it.
It is a shame to have to say it, but the reality for financial advisers and pension providers is that they have to work within the environment created by government. The changes going through in advance of A-Day next year look to be all about bringing new options and flexibility to that half of the workforce that is lucky enough to already have substantial pension savings. We'd all like to see hundreds of thousands of new pension schemes springing up all over the place and millions more people starting pension saving, but realistically that's not going to happen, is it? Let's hope that one day someone will be able to recreate the past environment that enabled those of us with pension savings today to get started. For now though, the post A-Day world looks like being all about distributing more pensions to the millions who already have them.
First published in Retirement Planner, February 2005