Friday 24 May 2013

John’s Blog No. 128 Pensions

I downloaded the latest State pension figures for December 2012 from the DWP website, which made interesting, but not exciting reading and illustrated how far out of hand State pensions have become.
The total cost for pensions alone, before any welfare costs is now £79 billion for some 12.84 million pensioners; of these 1.29 million are females between 60 to 64 and 1.21 million are Britons living abroad, which also includes their dependent relatives.
Some of these are non UK Nationals and even include persons who draw dependent pensions from the UK and a second pension from their own Country; it is a nonsense state of affairs, particularly if they never lived here.
The UK resident remainder over 65, appears to equal the last total population count for the UK, in other words every pensioner in the UK is drawing State pension. This is contrary to the impression given by the NI contributory pension, where members have to meet a contributory number of years or pay extra NI contributions to qualify.
We are living in an imaginary never-never pension land, where what you believe you see is not actually there, it is already a universal State pension and the single tier proposals just reduce it to a single grey level for all; a Tory Government meeting full Socialist principles.
One can also realise the full cost saving penny pinching motives behind the change, when fully implemented the large rise in basic pension will result in real terms in a reduction in cost to £63bn, a saving of £16bn, which is a trick worthy of thee best magicians.
Such a saving, with the expected additional drop in welfare Pension Credit and other costs could fund the transition to a true defined benefit contributory pension scheme using NI contributions in the manner in which they were originally intended.
Over 20 years, this would create real savings to the State and meet the stated intention of rewarding those who work and save to ensure their own pension future. Your NI contributions would build up your pension fund to secure your retirement and even your potential care needs.
The benefits do not stop there, the effects of population increases would be met by such self sufficiency, without any dependency on those in work, who would not need to support you. Large investment funds would be generated to meet all our infrastructure needs and even the State would save money.
When combined with the new automatic workers pension scheme, which is necessary because the State has misused NI contributions, reducing State pensions to below the poverty level, all contributory members would receive a pension of at least half the average wage, the aim of most DB schemes.
Of course such a scheme would have to be expertly well managed and there are many examples of private schemes here and elsewhere who do just that, giving good returns at low costs. This is been discussed in previous blogs and over forty years pensions of four times annual contributions are possible in real terms.
This means that a saving spend of £20bn per year over forty years would meet pension costs of £80bn per year, much greater and real State savings than those presently envisaged, of course you could just halve present spend and double pensions to even £288 per week.
Everyone would be a winner!

Thursday 9 May 2013

John’s Blog No. 127 Pensions

The Queen’s speech held nothing new, what I found interesting was the Government’s attempt to sell the new State Pension with the emphasis on supporting those who work hard and support themselves.
The impression was given that the single tier pension was designed for those who make contributions, giving a fair return on such savings. I wonder if they have even read the proposals or even understand them or perhaps they think we are too stupid to bother or realise.
The facts are that these changes introduce a universal welfare benefit pension scheme at poverty level, regardless of whether you make contributions or not and you will be better off all round if you are one of the nots, as pension credit will make you better off.
No matter what you pay in or for how long, you will be no better off than the eligible welfare itinerant; you will lose out on the second pension and any pension for your wife, who will no longer inherit your pension if anything happens to you.
It therefore does not give a fair return or even any on the substantial NI contributions made by you or your employer, if you are one of the hard working people the Government claims to support. The eligible number of contributions years is meaningless, you get the same anyway!.
What we need is a proper pension scheme in which the NI contributions work hard for the benefit of the members, not someone who is already retired or about to, or even worse someone who has not paid in at all.
Yet changing the system to a more sensible rewarding scheme could benefit all, including the State, the present cost of £75bn, properly managed and invested, could halve the cost and double the payment benefit over a transition period to allow present liabilities to be met.
This is a theme which returns frequently in my blogs, but you don’t have to take my word, for a simple calculation on your computer, mobile phone or even old fashioned scrap of paper can confirm the results.
If you save £1,000 per year for 40 years, you will accumulate a fund of £40,000, if this money earns 5% per year over 40 years on the average amount of £20,000 it will grow by 100%, doubling the Fund to £80,000 when you retire.
This fund will support a payment of 6% per year, which is the drawdown level allowed by the revenue and also a level which can be sustained with even the highest life expectancy figures, that is survive as long as you do, giving an income of £4,800 per year, some £98 per week.
The single tier pension is at £144 per week, some £7,500 per year (currently £5,600), which would therefore require savings of £1,600 per year. On the average wage, the total NI contributions paid by you and your Employer are over three times this amount!!
So even if only a half of total NI contributions, just your part is put away, then you could expect an income of over £10,000 per year, 40% of the average wage, which would be in real current living costs if wages keep pace with inflation over the 40 years, which they have done in the past.
The investment return, growth figure of 5% is a reasonable safe figure, most pension funds have achieved this over the recent recession, many report 8 to 9% over 25 years and latest Investment fund figures for the past year show values twice this.
The State is therefore not looking after your NI contribution savings wisely or even carefully, in fact they do not even recognise it as your money in the first place and there are doubts that the new automatic contributory scheme will fare any better.
The need for a proper pension reform policy is well overdue, not one to suit the politicians, but one that meets the needs of its contributing savers as its first priority and gives a fair risk free return on the pension savings they make, so that they can retire with peace of mind.

Thursday 2 May 2013

John’s Blog No. 126– Pensions

The art of husbandry appears to be dead, nothing of course to do with marriage, but more a matter of utilising our resources fully and putting something away for a rainy day, now also known as forward planning and consideration of future needs.
Our ancestors did it, even the Egyptians stored their good harvests away for when the inevitable poor ones occurred, but we lurch from crisis to crisis, never learn and blame anyone else for what happens in the bad times.
There is no better example than pensions, we all know we are growing old and will need income and care as we become frail, but expect the State to take responsibility for us at that time.
Some two thirds of the working population make no personal provision for their own retirement future; to be fair, most thought they were doing so with their National Insurance contributions, but no one queried what the State was doing with their precious savings.
Neither did the State, it went into the universal Exchequer melting pot  to be lost for all time, resulting in the present “pay as you go” system, which has become a free for all welfare scheme, dependent on the earnings of those in work.
Present demographic changes are undermining this system, the number of pensioners and those on welfare, together with their needs are steadily rising, whilst the number of providers that is those in work remain the same or dropping.
This ratio, known as the dependency factor is changing rapidly, currently around 3 to 1 it is expected to drop to 2 to 1 over the next forty years and even reach 1 to1, with every person in work supporting a pensioner.
Even the time advantage is disappearing, you once worked forty to fifty years to support a pensioner who was expected to last half or even a third of that time. The result is a system which cannot be sustained and is grossly unfair with the apparent solution of all working until they die.
There is another way, which is the old one of husbandry and self sufficiency, each puts away enough to meet their retirement demands and needs, Even if the State wanted to, they will find themselves unable to do so and are in many ways responsible for the problem.
However the State could do a lot to help the situation, but will only do so if pushed hard by the general public. They could return NI contributions to a true pension scheme saving for the future by rebating part of this income to work hard, accumulate and grow.
Nest could become a full Defined Benefit Pension Scheme instead of a Loch monster, utilising all the major advantages of a group scheme running continuously through work and retirement, instead of an individual risk scheme.
The onerous pressures of levies, taxation and unrealistic liability requirements causing the demise of DB schemes could be reversed to promote their recovery. There is a growing awareness in the US of the major economic benefits of such schemes over DC and individual private ones.
Contributions to all existing schemes including State NI are currently more than adequate to meet all the needs and the growing numbers of UK pensioners. Out-dated annuities throw valuable Funds away at their peak for a return which is at least half that possible if they were to remain alive.
Just because their owner stops working, there is no logical reason why their Funds should, they have an earning potential and would fare better in a well managed group scheme and be more able to meet the changing needs of their member owners.