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.

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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).

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.

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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.

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