Say goodbye to your state pension

State pensions could well end up being swept away with defined benefit pensions, says Merryn Somerset Webb.

I wrote a couple ofweeks ago that the many changes in the pensions system looked to me among other things like the laying of the groundwork required to abolish final salary pensions in the public sector.

I wasn't at the time actually thinking about the state pension most of us are entitled to on our retirement. But if you think about it, this is about as good as defined benefit pensions get. Whatever you pay in (via your taxes), you get back a perfectly reasonable inflation-linked annuity payable for life.

Lets say you are in line for a state pension of £140 a week (£7,280 a year). If you had to buy that on the open market (from an annuity company), it would cost you not far off £180,000. Clearly, providing this kind of pension to most of the country costs an absolute fortune (particularly given the triple lock business).

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The solution, according to the Institute of Economic Affairs (IEA), which has just produced a paper on the UK's debt timebomband the huge spending cuts required to stop it detonating*, is to get rid of this type of defined benefit pension too.

It should be scrapped and replaced with compulsory defined contribution pensions just like the one in Australia (rather than the auto-enrolment/opt out system we currently have).

I like this idea. It would mean that everyone would end up with a pension they were directly responsible for, rather than one they depended on the state to produce for them.

But it's complicated too what about those who never work? Do they get no pension at all? And what fall-back for those who, having compulsorily contributed, then use the new pension freedoms to take it out and spend the lot? Where's the safety net?

It is complicated stuff, and obviously the IEA is not exactly a policy-maker. But this kind of chatter makes it even clearer to us that the end of the defined benefit pension is near and that the changes might end up more far reaching than even we initially thought.

* Sometimes I think these people must be reading our marketing material.

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.