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).
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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.
-
Our pension system, little-changed since Roman times, needs updatingOpinion The Romans introduced pensions, and we still have a similar system now. But there is one vital difference between Roman times and now that means the system needs updating, says Merryn Somerset Webb.
-
We’re doing well on pensions – but we still need to do betterOpinion Pensions auto-enrolment has vastly increased the number of people in the UK with retirement savings. But we’re still not engaged enough, says Merryn Somerset Webb.
-
Older people may own their own home, but the young have better pensionsOpinion UK house prices mean owning a home remains a pipe dream for many young people, but they should have a comfortable retirement, says Merryn Somerset Webb.
-
How to avoid a miserable retirementOpinion The trouble with the UK’s private pension system, says Merryn Somerset Webb, is that it leaves most of us at the mercy of the markets. And the outlook for the markets is miserable.
-
Young investors could bet on NFTs over traditional investmentsOpinion The first batch of child trust funds and Junior Isas are maturing. But young investors could be tempted to bet their proceeds on digital baubles such as NFTs rather than rolling their money over into traditional investments
-
Negative interest rates and the end of free bank accountsOpinion Negative interest rates are likely to mean the introduction of fees for current accounts and other banking products. But that might make the UK banking system slightly less awful, says Merryn Somerset Webb.
-
Pandemics, politicians and gold-plated pensionsAdvice As more and more people lose their jobs to the pandemic and the lockdowns imposed to deal with it, there’s one bunch of people who won’t have to worry about their future: politicians, with their generous defined-benefits pensions.
-
How the stamp duty holiday is pushing up house pricesOpinion Stamp duty is an awful tax and should be replaced by something better. But its temporary removal is driving up house prices, says Merryn Somerset Webb.
