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Take Control Of Your Pension

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One problem with this Government is that the message from the corridors of power isn’t always the one heard in (smoke-free) saloon bars or the high street hairdresser. The dramatic shake-up of the state pension, proposed in a Department for Work and Pensions green paper, could be a classic example of this.

Private sector pensions recently looked a disaster zone: new research from insurance giant Prudential showed that more than 35% of people retiring this year will have incomes below the poverty line, defined by the Joseph Rowntree Foundation as £14,400 a year.

Nearly one in five, says the Pru, will have to survive on incomes below £10,000 a year.

Now, without a single Zimmer-waving protest march by golden oldies, Pensions Secretary Iain Duncan Smith proposes a dramatically simplified single-tier state pension from April 2015 to give couples a joint £310 a week, allowing for inflation between now and then.

The new pension will require a minimum 30 years of National Insurance contributions, with contributions required for at least seven years to get anything at all.

Clear gainers from the change will be women who stopped work to bring up children, and the self-employed. A cornerstone of the package is a guarantee of no means testing.

Hey presto! Millions nearing retirement will reckon that with a couple of boot sales each year, a pair of well-used bus passes, a heating allowance or two and cut price coupons for cheap meals and short break holidays, they can just about wing it financially until they are too old to worry, all thanks to this whacking 50% ‘pay rise’ from the state. (The basic state pension has just risen to £102.15 per week for a single person).

In fact, the figure is not as generous as it appears: the current full state pension is topped up today by a minimum income guarantee, for those who qualify, to £132.60, while couples can collect a minimum £202.40 per week if they apply for means-tested pension credit.

Some 1.5 million pensioners currently get more than £150 a week from the state, thanks to top-ups from the state earnings-related pension scheme (Serps) or the state second pension (S2P) paid for by higher National Insurance contributions.

Luckily, Tom McPhail, head of pension research at financial advisors Hargreaves Lansdown, put me right.

“What the Government is saying is that this is all you will get when you stop work, at a progressively later age,” he explained.

This revamped state pension, you see, is really a clarion call to start saving, because by itself it can’t finance a comfortably old age. But few will see it like that.

McPhail says: “The current system is complex, somewhat arbitrary and relies heavily on means testing to get income above the basic £102.

“This will simplify bureaucracy and, essentially, should encourage today’s workers to save for tomorrow.

“If comfortable retirement requires an income which is two-thirds of your final salary - the general assumption - you can only get it from the state pension plus a big top-up from money you save yourself.”

Andrew Hagger at Moneynet.co.uk sees this new package as part of a “carrot and stick” strategy: the stick comes next year, when the Government launches auto-enrolment into private pensions plans for all workers who have failed to sign up so far, which will take until 2016 to reach everybody.

Hagger says: “People are not going to be encouraged to save for retirement if when they retire they find that they lose out on the state handout due to means testing, as they do at present.

“If they are guaranteed £140 per week - or £155 in 2015 - on top of their own pension, the incentive to save will be much greater.”

From next year, employers will be legally obliged to enrol every worker into private pension plans, and to re-enrol them every three years if workers keep opting out. If they change jobs, their new employer will auto-enrol them again within there months.

However, British workers will have to save harder - and longer - than ever before to turn this apparent Government generosity into a liveable income for an old age which for many could stretch to a 100th birthday.

Assuming an average final income today of nearly £26,000, Hargreaves Lansdown calculates a comfortable retirement income is £17,200 per year (two-thirds of wage).

The new revised state pension promises £7,280 of that, so workers’ own savings must produce the other £10,000 or so. At current annuity levels, that means a private pension pot - hopefully boosted by employers’ contributions - of around £200,000.

Yet this year, the average private pension pot used to buy an annuity to deliver retirement income - saved by a generation which enjoyed soaring house prices, was largely free of further education and had an abundance of jobs for most of their working lives - is less than £30,000.

Today, house prices are falling, shares are largely static and student debts are huge. So, will today’s workers in their 30s and 40s manage to save seven times as much as today’s 65-year private sector workers have managed?

A Chatham House studies forecast that workers retiring in 2030 - born in the early 1960 s- could see a 61.7% drop in income when they stop work, leaving them on net incomes of £11,000 in today’s money.

The rough rule at Hargreaves Lansdown is that we should save 10-15% of our pay each year - in both company pensions and ISAs - to have any hope of a comfortable retirement.

If you haven’t started to build your long-term savings so far, start tomorrow and save a percentage which is half your age: 15% for 30-year-olds, 25% at 50.