Britain is becoming a country of ‘pensions apartheid’

Britain’s pensions system is becoming increasingly unfair, says Merryn Somerset Webb, with public sector workers consistently favoured over private sector workers.

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Osborne: should equalise the treatment of DB and DC pensions

In last week's podcast, John and I talked about the UK pensions system. It is constantly in transition and increasingly unfair. The older generations appear to be consistently favoured over the young, and public sector workers consistently favoured over private sector workers.

Should George Osborne introduce legislation to equalise the treatment of defined benefits and defined contributions pensions?

But it isn't just us any more. An increasing number of people have noticed just how mean it is to successful investors (who are taxed for doing well see our work on this here) and on those with defined contribution (DC) pensions, who need to save more to get less than those with defined benefits (DB) pensions. A letter arrived today from a reader on just this subject. He has a DC pension. He's done the numbers, and he's pretty angry.

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"A civil servant whose starting defined benefit pension is £50,000, and who gets a further lump sum of £150,000 doesn't tip the threshold, because the pension is valued for the purposes of tax at £1.15m (£50,000 x 20 = £1m + £150,000 = £1.15m). The public sector pension is likely to have a number of benefits, such as inflation linking and 50% spouse's benefit, so if the pensioner dies before his or her spouse the survivor is covered too.

"If a 65-year-old with a private defined contribution pension wanted to buy an annuity that will pay a starting £50,000 with inflation linking and 50% spouse's benefit would need approximately £1.6m rather than £1.15m, not taking into account the £150,000 lump sum."

Not fair is it? I don't think so. And our reader doesn't either.

"It seems increasingly apparent that the UK is a country of pensions apartheid, where many civil servants and public sector workers enjoy valuable and entirely secure pension benefits underwritten by the taxpayer, while those in the private sector must save and suffer investment risk while ending up with a pension potentially half that of a comparable position in the public sector."

Time perhaps for another petition

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.