Facing a nightmare over pensions cash

Millions of workers face a stark choice if we are to avoid poverty in old age, a hard-hitting report warns today. We will either have to pay more tax, save more, or work on past the age of 65.

The problem, according to the Pensions Commission report, is that as a nation we are saving £57 billion less every year than we should be if we want to ensure we can all enjoy a comfortable retirement.

Warnings about the so-called "pensions time-bomb" are not new.

The fact that we are living much longer sees more people living on past retirement age than before, and for longer. This leaves a larger population of retired people compared to those still in work than ever before.

Couple this with the fact that many people during their working life adopt a "live for today" attitude - enjoying their lives without attempting to provide or save for the future - and you have a recipe for difficult times ahead.

What is new about today's report, commissioned by the Government, is that it identifies the scale of the problem. The £57 billion shortfall is double previous estimates - a pensions black hole of frightening proportions.

The question is what do we do about it?

In an article in Sunday's Observer, Pensions secretary Alan Johnson called for an end to the "head in the sand" culture and the beginning of a "national debate about future pensions policy".

The publication of today's report fires the starting gun on that debate.

In its report, the Pensions Commission identifies three "unpalatable choices" - higher taxes, a big increase in private savings, or later retirement - as its solution to plugging the pensions gap. But would they work? And, more to the point, would they be politically acceptable?

Higher taxes

One way of guaranteeing a decent basic state pension for all is to increase taxes to pay for it. Charity Age Concern is in favour of increasing National Insurance contributions so as to guarantee a basic state pension of £105 a week for a single person.

It is no good simply tinkering with the existing state pension system, adding means-tested benefits here and heating allowances there, according to Sally Hutchinson, chief officer of Age Concern York. "What we need to do is to start again," she said.

A guaranteed basic state pension of £105, paid for by increased National Insurance contributions, would take the worry out of retirement and provide enough for everybody to live with dignity, according to Sally. It would also make it possible to simplify the system by sweeping away the need for means-tested top-up payments such as pension credits. And because workers knew exactly how much state pension they would get on retirement, it would make it easier to plan for the future. Those who felt they would be content to live on £105 once they retired would not need to worry about saving. Those who wanted to ensure a higher standard of living after retirement, meanwhile, could invest as much as they liked or could afford in private pensions and savings plans.

Raising taxation, however, would be unpopular. The British are already taxed enough, according to Don Parlabean of York Older People's Forum. Gerry Gray, a 71-year-old financial adviser based in York, agrees. Raising taxes to pay for a higher basic state pension would amount to punishing those who had taken the trouble to provide for themselves, he said. "And I don't think people want to pay more tax. End of story."

Unsurprisingly, the Government already appears to have ruled out tax hikes.

An aide to Chancellor Gordon Brown told newspapers: "The Chancellor has made clear that we will do nothing to put the public finances at risk, including increasing public spending on pensions to European-style levels."

Increasing savings

Gerry Gray is very much in favour of policies designed to increase the amount that individuals are putting aside towards their own retirement. "People are living for today with no thought of tomorrow," he said. The consequence of doing nothing could be a generation of pensioners living in poverty, he warned - with a knock-on effect on the rest of the economy as pensioner spending power collapsed. "We could become a Third World nation if a large proportion of the population were living in poverty," he said.

A dire warning. But it is no good the Government expecting people to just start saving more for their retirement because they have been told to do so, Gerry said. Human nature being what it is, that would not work. "So I think there has got to be some form of compulsion. Employers could be forced to take 5-10 per cent from the wages of employees, for example." He would also like to see more incentives to encourage savings - better tax breaks, for example, and pension savings schemes where you could withdraw some money before the scheme matured in the event of hardship.

"How can you expect somebody who is 25 or 30 to be putting £50-£100 a week into something if they can't get anything back until they are 65?" he said.

Don Parlabean agrees that people need to be encouraged to take more responsibility for their own futures by putting money aside for their own retirement. But what about those who cannot afford to? There are some workers who are virtually on the breadline as it is, points out Jim MacAuley of Target Training and Recruitment, a York recruitment agency that helps older people back into the workforce. "Some people cannot afford to save," he said.

Working longer

Adair Turner, the Pensions Commission chairman, is thought to have originally favoured raising the state pension age to 70. That is not on the cards: but new age discrimination legislation expected to come in by the end of 2006 will pave the way for people to work past 65 if they want to. It is an option that Tony Blair clearly favours. In a keynote speech yesterday in which he set out his vision of the "opportunity society", he said: "We must change the culture that can write people off at 65, if not 60 or 55, whether they want to work or not."

Jim MacAuley is a big fan of people being allowed to work longer if they want to. "People are now living longer and healthier lives," he said. "And there are a lot of statistics which prove that people who enjoy their job and are happy to continue working probably do live longer."

At 71, Gerry Gray has no intention of retiring just yet. He loves his job, he says. "And is it right that if we are living longer, we should retire at the same age as we used to." He favours a situation where workers have the flexibility to retire gradually, cutting down the number of hours and days they work over a period of time to 'ease' themselves into retirement as and when they want.

Sally Hutchinson, too, has no problems with people working past 65 if they want to. "But they shouldn't have to work longer when they don't want to because they can't afford to live otherwise," she said. "We want people to be able to enjoy the later part of their life, not to have to continue working until they damage their health just to pay the rent."

Tory plan to solve the crisis:

The Conservatives yesterday published their own eight-point plan to tackle the pensions crisis and "restore our saving culture".

The key points include:

Restoring the link between pensions and earnings, rather than inflation, to take more pensioners out of means-tested benefits.

Introducing a Lifetime Savings Account, with Government contributions remaining intact to help fund retirement while personal savings could be withdrawn provided they were replaced.

Longevity Bonds could be issued by the Government to help pension providers insure against the risk of providing a pensioner with an annual income for life.

Allowing companies to promote their pension schemes to employees even though they are not registered to provide financial advice.

No limit on senior executives' pension funds, provided all employees could join the company scheme on similar terms.

Encourage companies to assume all employees would join the firm's fund unless they actively opt out.

Using unclaimed assets in dormant bank and building society accounts to rebuild pension funds for victims of company schemes that are wound up when firms go bust.

Updated: 10:03 Tuesday, October 12, 2004