Pension reform has been a hot topic over the last month after Pensions secretary Iain Duncan-Smith addressed the Department for Work and Pensions In May outlining his plans for the next five years.
The Government managed to keep a relatively tight lid on its plans for pensions up until the latter stages of announcing their deficit tackling measures but following promises of change, and pleas for reform, the full scale of what’s to come is beginning to emerge.
We were told from the beginning that some measures would almost certainly be put into place to start changing the way people save for retirement but it looks as though the UK pension sector could see its first big overhaul for generations.
Here are the speculated plans so far:
The state retirement age, which is currently 65, looks set to rise gradually. In the long run the Government believes that, by doing this, this will save £108 billion by 2050. And it will allow workers who do not feel ready to retire in their mid-sixties the opportunity to stay in work and boost their pension funds.
The age at which you can claim a state pension is also earmarked to change under the new coalition’s plans. At the moment women can claim aged 60 and men are eligible once they reach 65 but the plan is to raise this to 68 for both by 2046. Although this will save the government billions it also means that pension savers will need to put away more money and may be forced to work well into their 70’s.
The new Government has also proposed to scrap compulsory annuitisation. It was one of the Liberal Democrat’s core proposals for pension reform and will mean pensioners will not have to buy an annuity by the age of 75. Instead they can keep saving and even pass their pension funds on to beneficiaries.
A major reform measure proposed is to triple-lock the value of the state pension so that it will rise by the minimum of prices, earnings or 2.5 per cent, or whichever is higher from April 2011.
This means the basic state pension will fall in line with inflation, interest rates and other factors that affect its value. If earnings are going up fast, the pension will increase in line with earnings. If prices are going up it will increase in line with prices. And if neither is rising it will go up at least 2.5 per cent.
Although this is not directly linked to pensions the tax exemption limit may affect some pension savers. Higher rate tax payers may see their cuts to the amount of tax relief they get on a pension fund if the limit is reduced to £2,000 from its current £10,000 – as proposed by the Liberal Democrats.
Aside from the core features mentioned above there are also plans to shake up the public sector pension system.
Public sector reform
There are seven main public sector pension schemes, covering teachers, civil servants, local authorities, armed forces, fire, hospital and police but six of them are unfunded. They are paid for by today's staff contributions, with the Government making up the difference but there are more questions being raised about the affordability of these schemes.
Cut backs to this sector were announced by Chancellor George Osborne in his bid to cut £60 billion in public expenditure. The full details of the Government's plans are expected to be given on June 22 when the Emergency Budget is revealed.
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