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OPINION

Don't put your trust in state pension reform

Don't put your trust in state pension reform
January 18, 2013
Don't put your trust in state pension reform

Although the flat-rate pension is less than some can receive under the current system and much less than the minimum wage for a standard 35-hour week (£216), it is still a decent sum, particularly if you work out what it would cost to buy that in the private sector. In order to build up an equivalent pension of £144 a week, a 65-year-old would need a pension pot of around £206,250 (source: Hargreaves Lansdown).

According to the Institute for Fiscal Studies, the main winners under the new system will be the self-employed, plus anyone who has contracted out of a defined-benefit occupational scheme. The proposed reforms would end contracting out and thus increase the state pension rights that this group will accrue. But the main effect in the long run will be to reduce pensions for the vast majority of people.

Politicians say this State Pensions White Paper is a watershed moment, signalling an end to 30 years of tinkering with the state pension system. Don't believe them. Similar claims were also made for the reforms announced in 1998, 2002 and 2006.

Pensions are now firmly on the political agenda as an area to be raided. Reductions have already recently been made to private pension reliefs. So could future governments be tempted to gradually erode the state pension too? Yes, they can.

The White Paper states that the government wants to link the state pension age with life expectancy. PriceWaterhouseCoopers expects a rise to age 68 may need to be brought forward at some point to around 2035 to keep pace with life expectancy projections. It predicts we could see the state pension age easily hit 70 by 2050. While that won't be breaking the state pension promise, it will move the goals for any plans you may have put in place.

This could be sprung on you suddenly. A cohort of women in their 50s are already feeling the pain of having state pension paid five years later than they expected, at 65 rather than 60.

Importantly, once the state second pension goes there will be no buffer to stop pensions being withdrawn from the higher paid. It is not outside the realms of possibility that state pension could end up a benefit for the poor like the dole. So especially if you are under 50, bear in mind that the final piece of the state pensions jigsaw could one day be means testing at the upper end.

My colleague Chris Dillow recently argued that we could all be saving too much for retirement. If the state pension is withdrawn from high earners or put back until later years then you will be glad you have saved more than you needed.

Raj Mody, head of pensions advisory at PWC, says: "A school leaver just entering the workforce may have to start saving an extra £100 a month just to bridge the gap between the current state pension age of 65 and their likely state pension age."

Everyone, whatever their retirement date, should sit down and work out how much they need to save on top of the flat-rate state pension to achieve a comfortable retirement. I have worked out that, based on research into the minimum income required for retirement comfort by the Joseph Rowntree Foundation, you will need £12,000 a year, so after taking state pension there is a significant gap to fill.

Make £200,000 your absolute minimum target capital for retirement. Richer investors will want to double that target to £400,000. The higher figure will free you from dependency on state pensions.