Private Pensions - Darling Loses The Plot

It is estimated that only 4% of the working population reaching the age of retirement will earn anywhere near two thirds of their final income and that includes civil servants, MPs, NHS, teachers, emergency service employees et al who are on fantastic schemes and reach their full entitlement.

So it is very clear that there is simply a massive issue about the amount being saved for retirement. The Government initially attempted to try and plug the looming holes for the future by attempting to incentivise people to take up private pensions via the stakeholder scheme and force employers to contribute into them on their behalf. It was a pitiful attempt to cover the cracks and most of the schemes are pretty laughable. One of the points about the credit crunch and recession was that while we were all leveraging our assets to borrow more money to bolster our actually diminishing wages, savings were going negative.

The facts are simple - nobody is putting enough away for the future.

Changing Thinking

Again, one of the features of the boom of the last 12 years is that we have lived the 'here & now' and forfeited much of our future planning and specifically on pensions. For some odd reason many believe that their property portfolio will sort this out but we have had a stark reminder of 'what goes up up must come down' lately. Plus, Mr. Darling has suddenly got very hard on second homes which for many was seen as wise investing for the future.

At some point, society in general will have to turn its thoughts to how it is going to keep itself in the same standard of living in retirement. I can safely say that it is a matter about which I am very concerned for my family. Despite prudent savings and pension planning, it is nowhere near enough to get me anything like two thirds of my current earnings.

So it came as some surprise that Darling would start to throw cold water on those that change part of their salary and bonus to pension contributions.

Government View

True to the 'here & now' Darling has seen that those around the £150,000 total salary and bonus will be keen to sacrifice some of the salary to get below the threshold for 51.5% (maximum rate plus NI increase) and take the missing part as an employer's contribution on which no tax is currently paid. But Darling is looking at stopping that with a tapering tax system on employer contributions to be paid by the employee that will, for those on £180,000 or more, be up to 30%.

It is seen as stopping tax avoidance as not only is the tax relief saved but the employer pays no NI on the contribution. But it is a false economy - we really need to be pushed to save more for pensions and decrease burdens on the state. If people can maintain their living standards in retirement then there is a fair chance that the strain on the NHS will be less as more people will afford private healthcare as an example plus we will pay more tax (again). It's more than that - society needs to look forward and make sure it is putting aside more - we need to get that discipline in us all.

The tax relief is seen as being unfairly biased to top earners - that's rubbish as all that is happening is that tax already paid is being claimed back. If this were to be widened to all pension contributions then people will have to start thinking about how they can mitigate costs in retirement and that will almost certainly mean that retired people will look to countries like Cyprus where tax is 20% and pensions are portable. I know I have looked at Cyprus and other places like Malta to find a good alternative as this may just be the difference between being above or below the 'two thirds' earning level in retirement. Even if it is not that close, it is now a serious consideration.

While everyone seems to be fixated on the current top earners fleeing the coop, there is more of a danger that middle earners will leave the country in retirement and it is just as barmy as they will be tax payers.

Short Termism

What we are seeing from the Government is a number of short term moves to try and stimulate the 'here & now' again and try to get people to start spending while grabbing money off the top earners which they seem to believe will be popular amongst most earners. After all there are not that many people in Britain that earn over £150,000 a year, and many of those will only be just above it as normal employees and not Directors who may get supplementary goodies.

This may be a precursor to the phasing out of tax relief on pension contributions for PAYE taxpayers and the fall of the employer contributions as part of people's packages. I think it's opening up a gaping problem for the future.

Paying The Price

If you have steadily put money aside for your future in something like a pension, ISA or savings account, have had a relatively secure job over the last 10 years and are due to retire in the next 5 to 10 years, then you are probably bearing the brunt of the financial mess the country is in.

With interest rates at 0.5% and the stock market behaving like a lead-weighted yo yo, prudent savers have been amongst the worst hit by the financial fiasco. It is also likely that the same people will be the major port of call for solving the long term borrowing problems that the Government has bought for the future.

The Pension Pain

If, like me, you have seen your potential earnings in retirement trashed inside of 18 months, it is pretty disheartening to watch the massive monies being spent which we will have to pay back in the future. It can only mean one thing - higher taxes which will probably mean that we will have to work longer in order to save enough money to retire while the burden in retirement will be higher.

The reward for sensible financial controls and diligence by individuals is to have a shorter and less comfortable retirement.

The problem is very serious and there is no longer any real solution to it. The stock market may recover over the next 5 to 10 years but that will for many just get their pension pots back to some kind of parity to the value just ahead of the Crunch. How galling then to see Fred Goodwin lose billions and walk away with a highly lucrative and secure pension from the age of 50 for the rest of his life. But then again, how galling to see rafts of Civil Servants and Politicians get the same benefit but paid for entirely out of your pocket in current tax payments.

Making Pensions Pay

The serious outcome to all of this is that there is a greater potential for people to retire and move abroad to where tax regimes are kinder. Cyprus is currently a country that offer a superb climate, is very anglophile, and has a tax rate of just 20% on pensions. Properties are still reasonable value, the infrastructure and law mimic the UK, English is widely spoken and you are never far from a beach. For the homesick, there are branches of Debenhams to get the essentials like HP Sauce.

I am sure there are many other places, hopefully, that will keep such status despite the onslaught of the EU and 'harmonisation' which is not the process in which Harriet becomes first PM and then President of the United States of Europe - what a terrible nightmare that would be.

But certainly, this is a very real problem for the future and threatens to be another blow to the Government's plan on paying back its borrowing. If less people in retirement stay in the UK, then again tax revenues will fall - particularly if they take their estates beyond the borders of the UK and out of range of Inheritance Tax.

This Government has systematically ignored the growing problems of providing an income in retirement unless you are a Civil Servant or Politician where the fabulous pensions are paid for in current taxes - a nice 'Ponzi Scheme' for those in it. With better than 1 in 4 jobs now in the Public Service, more of our tax will be paying for these pensions as time goes on while we get nothing in return from the Government.

Personally, I think guaranteed, end salary schemes for Civil Servants and Politicians should be stopped immediately and make them carry the same burden as the rest of us and stop us paying for lazy bureaucrats' retirements funds.

Next up - Public Servant Expenses Accounts.