vests don’t always fit
It’s depressing to wake up this morning , the weekend after the end of Pension Awareness Week, to find awareness of the value of the state pension is well – weak!
In this blog I put forward three views of how valuable the state pension is
- How you can value it against the cost of an annuity
- You can’t put a cost on it – it should be viewed as a Ponzi
- It is what it pays.
My argument is simple, the state pension is what it pays ordinary people and it is should be valued for what it does, not what it costs today or might cost tomorrow.
The state pension as an annuity
First there is this post from Interactive Investor that leads to a blog that tries to answer the question
How much is the state pension worth?
View one; £199,000 pp – Interactive Investor.
How much private pension wealth would you need to buy an annuity with the same income?
The figures are staggering!
interactive investor calculations show that you would need a pension pot of £199,000 to buy £10,600 annual income, the current level of the full new state pension. (assuming an annuity that escalates 3% each year)
For couples, you would need joint pension wealth of £398,000 to equal two state pension incomes.
That’s more than most people could dream of saving themselves in their pensions, with average workplace pension wealth still too low to provide a decent retirement income.
And separate research as part of our Show Me My Money pension report, to be published next week, shows that 28% of over 55s have no pension wealth apart from the state pension.
The figure is staggeringly inaccurate as it’s based on the cost of a unisex annuity for healthy person at 65 and includes only 3% inflation protection.
If the calculation was done 18 months ago, we might have had as an answer £300,000. Were interest rates to rise as quickly next year as they have this, then the “value” of the state pension would have shrunk again.
Comparing the state pension to the cost of buying an annuity has very little value,
The state pension as a Ponzi
Many people think that the state pension is worth getting rid of, or at least getting a substantial downgrade.
These arguments are consolidated by Claer Barrett in the FT
Claer takes the opposite view to Interactive Investor, arguing that because you can’t pin down the future cost of the triple lock – it should go. I guess a lot of things should be reformed on that basis.
Like many people in the private sector, Claer is happy to dismiss the State Pension as a Ponzi Scheme, despite it being the bedrock of most people’s retirement income expectations
To get an idea of how important the pensions industry sees the state pension , look at the webinar line up for Pension Awareness Week.
26 sessions about private pensions, one about the state pension!
We are great commentators on wealth but not so good on pensions.
The state pension for what it is.
The State pension pays up to £10,600 this year and up to £11,500 next (if the triple lock is fully applied). People should have a reasonable expectation that it will go up by at least inflation whatever the politics meaning that for many people it is the most important pension they will get. It may be their only source of regular income in retirement.
It is therefore extremely valuable and one of the wonders of our welfare state. Other countries may have overtaken us, in state pension provision but, via the triple lock, we are getting back to parity. I hear arguments that the triple lock may not be the best way of doing it, but it’s the way that we chose in 2010 and it is doing the job.
Despite the administrative problems highlighted by Steve Webb and LCP, the State Pension is paying to millions of older people according to plan, the state pension forecast system is helpful and the system by which we can top up state pension credits is working well. Pension Credit take-up is increasing (largely due to Government initiatives). There is a lot to value in our state pension, it is an effective element of our welfare state.
Valuing the state pension by what it pays is a much better way of going about things.
Vested interests and the state pension
Everyone in financial services has a view on the state pension. Savings organisations want to use it as a benchmark for private saving (you are going to have to save a lot more than you think).
Those in pensions policy want to denounce it as a Ponzi scheme that can only pay out in full at the expense of savers people yet to retire. This is infact the same argument , but spun to appear about intergenerational fairness.
I hear other arguments that the Government should be reprioritizing towards health and social care.
But the private sector (with a few noble exceptions- Martin Lewis being the most obvious) ignore the immediate and real value of the state pension and of pension credit (for those who need it).
The people who don’t get private pensions but do get the state pension are the people who watch Martin Lewis. They don’t flock in their millions to find out the latest trends in workplace pensions, they want to know what the state will pay them back , for the years they have paid their taxes.
They don’t read the FT , if they comment, they comment to each other on websites those in financial services do not read. There are 41,000 recent comments on pensions on MoneySavingExpert and the vast majority are questions about state benefits.
If we care about pension awareness, we should be aware that the pension that matters to ordinary people, is the state pension.
The current state scheme provides a solid foundation, offering 30% of a living wage. And if you have savings between £200,000 and £300,000, it increases to 60% of a living wage. Additional income can come from other savings or inheritance.
To ensure your financial security, it’s important to consider inflation and regularly revisit your target each year.
It’s worth noting that individuals are motivated to avoid losses and take action to protect their interests. While we often take our satisfied needs for granted, it’s crucial to stay informed and not be swayed by misleading terms like “gold plated” or pension illustrations that don’t consider the impact of time on buying power.
Realizing that you may need 30 times the emerging benefits might initially come as a surprise, but by recognizing this early on, you can proactively avoid planned poverty and secure a comfortable future.
There will always be a proportion of the population for which basic plans are impossible to look after these a productive economy is required so that the number requiring help is smaller and the tax base can support them. Right now the state scheme and unfunded arrangements are vulnerable.