The politics of pensions

When politicians play with pension proposals it's rare they'll ever make much difference, even if they do see the light of day. Will the Tories' latest announcements be any different? .

I’m sure I’m not the only one to view the next three months’ electioneering with grim foreboding, bordering on distaste, crossing over to impotent rage during the BBC News. My money is on a hung parliament, but if Cameron does manage to get into No 10, he’s committed to a couple of quite significant pensions changes.

First, he would index the State Pension to National Average Earnings (NAE). I’m sure that the focus group that came up with this one thought it would be welcomed by the silver surfer generation. After all, wage inflation has always run ahead of price inflation, and it always will, won’t it? (ironically, it was Margaret Thatcher who removed the link in the first place back in 1980!).

Perhaps, and then again, perhaps not. Unemployment is likely to continue to rise, and there is going to be some sort of pay pause in the public sector. These factors, coupled with all the problems in the financial services sector, might well pull NAE down below inflation.

Theresa May is the shadow minister, and she hasn’t thought this one through.

She has also fallen victim to a very capable lobby and announced that the Tories will end compulsory annuity purchase at age 75. This is a long story, but the deal has always been that in return for tax breaks associated with saving for old age, with the tax free cash break at retirement thrown in, the pension saver would use the money to provide a retirement income. Otherwise, Cyril and Doris, both aged 65, would blow their accumulated pension savings on a world cruise and come home to means tested benefits.

The aforementioned lobby does not like annuities. They use words like ‘rip off’ to describe an insurance company that accepts £100,000 in return for a promise to pay an annuity of £5,000 for life, and keeps the capital when the unfortunate annuitant pops his clogs six months later. Their intellectual stance appears to be that an annuity is only a good idea if you can guarantee that you will live a long time. The flip side of that argument is that there is no point insuring your life unless you plan to die in the very near future.

Theresa hasn’t thought this one through either. Some citizens already select against the tax payer by declining to save anything for their old age, preferring to spend the cash as they go along, safe in the knowledge that whoever is in power when the time comes will sting the prudent to feed the feckless as well as the genuinely needy.

The Tories in power will have to modify their policy. They will have to be sure that Cyril and Doris don’t go on that cruise until they have bought an annuity large enough to keep the pair of them off means tested benefits. That suggests that they will have to be forced to buy an annuity of around £10,000 per annum, which needs a fund in the region of £200,000.

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