Don’t believe the flat-rate hype

Millions will be worse off under the government’s proposed flat-rate pension, but it will still be forced through says Teresa Hunter

Our mothers taught us to always look a gift horse in the mouth. But when the Coalition announced a higher state pension for all, we were so busy rejoicing, we forgot mum knows best.

Any day now the Government will publish the summary of responses to its consultation on a flat-rate pension.

Well, that’s the plan anyway. Publishing the responses will be easy. But will Government be in any position to firm up its plan to pay £7,500 annually, in today’s money, to virtually all future retirees? Surely, they’ll kick further action into the long grass?

Not on your Nelly. The Government’s pension giveaway conceals a wicked little secret. Its generous new pensions won’t cost the Treasury a penny, and will actually bolster its coffers via higher National Insurance contributions and lower means-tested benefits. We have this information thanks to a report from the Pensions Policy Institute. Not the stuff about the wicked secret. That’s me getting carried away.

But according to the PPI, paying every qualifying citizen a state pension of £7,500 after say 2010 would not cost any more than the current system, because it is a massive exercise in redistribution.

If it goes ahead the gap between the richest and poorest pensioners will be slashed at a stroke.

Nearly seven million will gain, including the unemployed, very low paid, people with poor work records, parents and carers with long periods away from the coal face. And they gain a lot, on average £23 weekly by 2035. These all currently get little if anything by way of a second-tier earnings-linked state pension, and, as such, are well-represented among the six out of ten pensioners who currently live on means tested benefits.

Without a decent guaranteed pension, which can justifiably be topped up by private savings, auto-enrolment is a nonsense. Worse, it is a mis-selling scandal in the making

But another group of future pensioners will pay for their windfall. More than five million workers earning more than £14,000 will be worse off by typically £18 a week, according to the PPI.

Significantly, more than a million pensioner couples will jointly lose £24 a week. In other words, what one partner loses outweighs what the other might gain. An inflation-linked income of £24 weekly is quite a deal for a couple to drop, costing, something around £40,000 to replace.

Employers will also face new pensions and NI bills which they will seek to pass on to their workforce. So rather than a win-win, it is a lose … lose…. lose.

But not for the Government, which has so many reasons for pressing ahead with the scheme, I think we can rule out delay. It’s a great pre-election bribe.

And without a decent guaranteed pension, which can justifiably be topped up by private savings, auto-enrolment is a nonsense. Worse, it is a mis-selling scandal in the making.

Currently 60 per cent of pensioners qualify for means-tested handouts. After the reforms this figure would be halved.

Indeed, if pension savings are further boosted by auto-enrolment, the number relying on benefits could be significantly more than halved.

Government coffers will be swelled by new inflows from the higher NI take. And all of this without costing the Exchequer a penny.

But is it right to pay the same reward in retirement to those who have worked hard all their lives and made a major contribution to the economy through their efforts and taxes, as it is to those who have chipped in far less?

Most within the pensions industry understand the trade off, but believe it is a price worth paying to establish a simple and sustainable pensions system.

In the main I’m with them. I’ve long argued that the solution to the pensions crisis must involve a decent basic guaranteed element. Dreams can come true.

All this is for the future, and so are many of the problems. Existing pensioners will be exempt. How long does the Government think they will be happy with that? And what will happen to the numbers when a future administration is forced to pay everyone over 70 the same enhanced pension?

Teresa Hunter is personal finance editor of Scotland on Sunday