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Without Urgent Action on Pensions, Old Age Will Be something to Fear 

By Ros Altmann, Telegraph.co.uk

April 25, 2009 


United Kingdom


The credit crunch has worsened our pensions crisis dramatically, so one might have hoped that this year's Budget would contain some helpful measures. Not a bit of it. In fact, it contained yet another stab in the back for a system that is already on its knees. 

Alistair Darling said the Government is committed to "encouraging and rewarding saving, and enabling people to meet their income aspirations in retirement". But he then announced measures that will damage the pensions of top earners, while doing nothing to help other people's pensions at all. 

The Chancellor declared his policies were guided by "principles of fairness and opportunity". He said it was unfair that one quarter of the £30 billion spent on tax incentives for pension savings should go to the wealthiest 1.5 per cent. His answer was to launch yet another raid on pensions, this time for those earning over £150,000 a year. He proposes to remove top-rate tax relief on their pension contributions – and to tax their employer contributions as well. 

This presumably politically-motivated step has nothing to do with "fairness". If it was about fairness, the Chancellor would have redistributed the revenue raised to improve other people's pensions. He didn't. But the measure was certainly guided by the "opportunity" to raise more money from pensions. 

This is yet another in a long line of measures – starting with the 1997 dividend tax raid – which have consistently undermined pensions. 

Hitting top earners' pensions also jeopardises ordinary workers' retirement incomes, since if bosses no longer have any self-interest in pensions, they will be less enthusiastic about providing for their workers. In our rapidly ageing society, this is seriously bad news. 

So how did we end up in this mess? Instead of encouraging people to save while the economy was doing well, Government policy encouraged spending and borrowing as if there was no tomorrow. But there is a tomorrow. And for those approaching retirement, it is looking distinctly bleak. 

How are future retirees going to achieve any measure of security in old age? Until about 10 years ago, we had one of the best retirement savings cultures in the world. The UK had more money in private pensions than the rest of Europe put together. 

This is partly because the UK state pension is so disgracefully low that without other income we would have no chance of a decent retirement. Government was relying on employers and individuals to provide good private pensions to supplement their meagre state payments. 

But almost all our generous, traditional, private-sector final salary schemes have closed after being hit by Government-imposed regulatory and tax burdens, as well as poor investment returns and longer life expectancy. As employers cut back, millions of people are heading for an impoverished old age. This is a recipe for long-term economic decline. 

We cannot keep going as we are. A radical rethink of both pensions and retirement is long overdue. We can't rely on the state. We can't depend on a decent private pension. We can't even save for our old age just now, since the return on savings is virtually non-existent. 

So what can be done? I think it is inevitable that retirement at 65 will become a thing of the past. More and more of us will have no choice but to carry on – perhaps on a part-time basis – until we are 75. Retirement will become a journey, rather than a destination, and pensions will be more of a supplement to earnings than a total replacement. 

One way of making this a little more acceptable would be for the Government to promise in return that all British citizens would become eligible for a much-increased state pension once they reach, say, the age of 75. Not only would this be simple and fair, it would also mean the Government could abolish the requirement to buy an annuity. 

We also urgently need to restore our once-strong savings ethic. Over the past decade, Government policy has transformed a culture of self-reliance and saving into one of debt and dependency. Our financial regulator, the Financial Services Authority (FSA), has operated asymmetrically – encouraging borrowing while discouraging saving. Under the FSA regime since 2000, it has been incredibly easy to obtain a £200,000 loan that the borrower could never afford to repay – self-certification, no risk warnings, no checks. But to put £20 a month into a pension has required reams of forms, risk disclosures and compliance checks. Hardly a wonder, then, that UK savings have plummeted. 
Unfortunately, policy-makers have remained in denial about the pensions crisis. Of course, this could be partly because it just does not affect them directly. Politicians – and the civil servants advising them – have fully protected, recession-proof public-sector pensions, courtesy of taxpayers whose own retirement plans lie in ruins. Now if we are talking about fairness and pensions… 

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