What will the Government do for me? At the current time in the UK the Government offers all pensioners a basic state pension. The current level of basic state pension is £89 per week. All women over the age of 60 and men over the age of 65 are entitled to receive this pension, subject to their National Insurance records and working credit during their lifetimes.
There are secondary Government schemes such as the State Earnings Related Pensions Scheme (SERPS as it used to be known) which are a top up for certain classes of people who have worked in employed positions without the benefit of a company pension scheme. These are the basic and second state pensions and for those who have other income sources and other savings, the Government pension arrangements, which are basically not means tested in any way so everybody is entitled to receive part of the sum, this can provide a very significant top up and make the difference between a difficult retirement and a comfortable retirement.
On the other hand for those people who are solely reliant on the Government pension it is a very small figure in todays term. The buying power of the Government pension is very limited.
There are two further points about the current position on the Government pension scheme. One is that the buying power of Government pensions has been falling throughout the last 20-30 years. Governments used to increment pensions year by year in line with earnings – no they do so in line with inflation and they use the less attractive inflation figure of the 2 standard inflation figures in this country. With the prospect of very low inflation or possibly even deflation in the next couple of years, pensions are probably going to deteriorate even further in their relative buying power.
The second and by far the more important point is that Government pensions are unfunded. There is no pension pot or monies put aside to pay for state pensions. State pensions come out of taxation so today’s working population pays for pensions for yesterday’s working population. It would be quite clear from information provided in other parts of this site that this one fact alone will create an unsustainable burden on Government in the future. A combination of the problems evolving with Government finances and very significant demographic shifts which means that the balance of people in work to people retired over the 50 years from 1980-2020 will have moved from something like 10 people working for every 1 retired to 2 people working for every 1 retired. It is quite clear that the tax burden will not be able to sustain a Government pension of any size.
It is our view that individuals should not bank on the Government paying them any pension at all because we believe that the income/expenditure position for the Government moving forward means that they will have to take radical steps to reduce future liabilities to state pensions. It is our guess that some form of means testing will have to be introduced so that it will only be those in the worst financial positions will be entitled to a Government pension. Of course we must point out that the Government policy is very much in the opposite direction and any statement about future pensions from Government is a reassurance that all pensions will be paid. But todays Government can no more judge the position in 10-15 years time than any individual commentator looking at it and it is our view that the figures are simply unsustainable and that Government will not be able to pay a pension to all the people at a decent level.
We recommend that this point is considered when pension planning and retirement savings are being calculated. Don’t bank on the current level of Government pension being around in 10-20 years time.
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