By John Penrose for CapX. Original Article Here.
With all the fuss about Labour’s ‘heat or eat’ decision to means-test pensioners for their winter fuel allowance, and the ‘did-she-or-didn’t-she’ media hyperventilation about Kemi Badenoch questioning the future of the pension triple lock, it’s easy to forget that Britain’s state pension is basically broke.
It was set up when most people only lived a few years beyond retirement, so it seemed pretty cheap at the time. And it was done in a hurry, with a pay-as-you-go-scheme where current taxpayers fund today’s pensions because Ministers wanted an immediate electoral boost from grateful pensioners at the ballot box, rather than slowly building pots of savings over a working lifetime.
But this ‘jam today rather than tomorrow’ approach doesn’t work now we’re all living much longer. The demographic timebomb of our ageing population means costs have soared, and a smaller-and-smaller working age population has to pay for more-and-more pensioners. That’s not sustainable, and if it was a normal pension scheme run by the likes of Prudential or Aviva, the regulator would close it down.
Fortunately the Government’s other, newer workplace pension scheme, the National Employment Savings Trust (NEST), offers a handy template for a better and more sustainable state pension in future. Started by a Labour Government in 2008, it has quietly been turning us into a nation of capitalists by building those long-term savings pots which the current State Pension doesn’t have. More than 12 million of us already have accounts with tidy nest-eggs building up inside them, worth a cool £30 billion in total.
So it’s a tried and tested, successful blueprint. But how do we upgrade it into a full-scale alternative for a better state pension scheme? By switching anyone who is 22 or under into an upgraded version of NEST, so it gradually includes everyone as each cohort of school and college leavers begins work and enters the new scheme.
Members will pay 3% lower employee National Insurance Contributions and divert the 3% saving into their NEST account so they are saving at least 11% of their earnings overall, which experts say is enough for a comfortable income for someone who starts saving aged 22.
The new and improved scheme will be financed by capping tax relief at £20k of pensions savings per person per year, the same as for ISAs, and only paying the relief on basic-rate tax rather than higher. But family members will be able to top up each other’s pensions if someone loses their job, gets sick or starts caring for children or relatives, and the top ups will still get tax relief as well as being exempt from inheritance tax too.
All other retirement-age benefits will continue unchanged, including Pension Credit, so people who haven’t been able to save enough will still get enough to prevent pensioner poverty from rising in future.
Once today’s 22-year-olds reach retirement age, the number of people getting the traditional pay-as-you-go state pension will start to fall, producing a steadily-growing surplus in National Insurance Contributions. So the National Insurance Fund’s independent trustees will invest the surplus in a new UK sovereign wealth fund until it becomes large enough to pay not just Pension Credit but all other retirement age benefits too. Once this happens, they will write a public letter to the Chancellor of the Exchequer saying that National Insurance is obsolete and should be abolished.
The result will be a fundamental but slow-motion social reset, building a proudly-independent, financially-comfortable and worry-free retirement for more of us in future. Each of us will have our own personal pension pot of capital investments, where the money will be legally ours and which no-one else can touch, so we won’t have to worry if future generations of taxpayers will earn enough to pay for our pensions, or whether politicians will keep the triple lock or not.
The new scheme will cut pensioner poverty by making sure most people have a bigger and better pension pot by the time they retire, but also by maintaining all other retirement-age benefits unchanged as a safety net for the few who don’t as well. And it will be fairer, because pensions tax relief will be paid at the same rate for everyone, rather than the current system which gives more to people who are better-off and less to people who don’t earn as much.
Last but not least, it will completely abolish National Insurance for employers and staff alike. It will take a while, but eventually pensions will be paid by the upgraded NEST scheme while retirement benefits like Pension Credit will be funded by the investments in the sovereign wealth fund, without any help from taxpayers. That means a 5p cut in personal income tax rates, and a whopping 13.8% cut for employers which will feed through into better pay and more jobs for less-well-off families too.
The state pension has taken more than 70 years to get into its current financial mess, so we shouldn’t be surprised if it takes a while to put right. But everyone knows that pension saving takes years and that the secret is to start early in your career, so we’ve got to think and act long term. If we do, we will have turned ourselves into a capital-owning democracy, and will leave our descendants a proudly-independent, financially-comfortable and worry-free future as a result.
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