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Hammond weighs in on pensions and property debate

Philip Hammond 620px

Chancellor Philip Hammond say he wants to tackle the “structural issues” around pension saving in the UK and discourage people from the idea their wealth should be tied up in property.

The Telegraph reports that in an appearance before the Treasury committee last week, Hammond suggested he would review the state of household savings and how these could be tapped to help the wider economy.

He said: “We do have some structural issues around saving in the UK, some of them specific to the UK- the structure of pension saving, the extraordinary role that housing wealth plays in the overall calculation of UK households.

“We do need to look at the interaction between the desire to save in the most effective way – and historically for many people that has been through housing – and the needs of the economy around accessing pools of savings. That is a productivity challenge for us.”

Pointing to the high level of saving among Japanese households, Hammond said: “If we could persuade Mr and Mrs Smith to save like Mr and Mrs Watanabe to finance our debt then we might be looking at a different scenario, but we are not.”

In September Bank of England chief economist Andy Haldane caused controversy when he suggested property was a better vehicle than pensions for planning retirement.

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Comments

There are 19 comments at the moment, we would love to hear your opinion too.

  1. So Hammond wants to take more of an individual’s worth under government control. Two questions: 1) Would you trust any government with your retirement plans, and 2) Whatever happened to old-fashioned conservatism whereby government interfered as little as possible with the freedom and rights of the individual?

    • The problem is the changes to legislation and the recapturing of tax relief paid out by Successive Governments – to encourage long term investing. The other point is the Cartel of Banks and the Pyramid Selling Structures and techniques of insurance companies and banks – under the Government Rule – and the Government Ponzi scheme under which they operate. The use of sponsorship along with “outsourcing” brings with it added corruption and potentioal for Fraud. The big problem for pensions are successive Governments – refusal to address th issues – leaving it to the last moment – which s when the Government is Bankrupt ( bankrupt of money and bankrupt of ideas – due to their incompetence). Why would anyone wish to save in any Long Term investment – when the Government keep changing the tax, the legislation and the opportunities ? No reasonable or sensible person should invest in a pension without the Compliance Statement – Your Money is at Risk. You may not get back, any of your original investment – the Rules May Change – the Risks will change – and the Legislation may be changed at any time and as often as the Government wishes. You may not have enough money to purchase an annuity. There is No Certainty in Pensions – due to Government games, penalities and ability to reclaim all tax paid out – and More !

    • Thats not what he said.

  2. Victim of dodgy claims 19th December 2016 at 9:55 am

    Decimating pensions by way of taking tax benefits away seems to me the wrong strategy. That’s politicians for you.

  3. When the pension rules are made by people with gold plated Defined Benefits schemes, with preferential Lifetime Allowance treatment, it is no wonder they are out of touch with the reality for most savers.

  4. When the next big vote occurs – vote them out. It has ever been such that this elitist group of individuals will look after their own club members first second and last. It astonishes me that by tantalising the public and feeding some good old fashioned greed with the scraps from their plates in various “de-nationalisation issues” that a whole generation bought into their politics. Now surely even the rosiest spectacles show the truth – the self
    Interest, the cuts, the flagrant approach to services ~ not bad really. Years of power – even Tony the Tory new how to play the game – for 200 gas shares you can win a nation! – psycholgical gerrymandering on a massive scale. The interference with “anything” is to suit THEM not us!

  5. Before Mr Hammond lectures us on pensions perhaps it would be better to look at the public sector pensions. Can we afford them the answer is “no”, at the current level. The unfunded public sector pension liability is probably close to the levels of the national debt and if inflation edges up will soon be growing at a fast rate. The government needs to lead and lead from the front on pensions, or the country will be divided by those that have and a growing number of those that do not have. A dangerous combination.

  6. Talk about from the sublime to the ridiculous, with the two comments I have read, from Mike Hurst, who make perfect sense, to Ian Townsend who is going on about the public sector pensions. Ian, public sector pensions did not look so outstanding some years back when annuity rates were high, did they. Especially when a lot of public sector workers do pretty crappy and difficult jobs on not such great pay in woefully understaffed conditions. Mike mentions psychological gerrymandering and it sounds as if you have bought into it. Don’t confuse the dustmen, the teachers, the nurses, the midwives etc etc with the few high earning civil servants who may be doing very well. It is just right wing propaganda from the likes of the Daily Mail (owned by non-dom Viscount Rothermere) and the, increasingly rag-like, Telegraph.
    I agree that future employees in the public sector may need to be offered a different type of scheme but to punish people who have worked in the public sector for years by changing their pensions would be totally immoral, but, I guess, that is what this country is rapidly becoming isn’t it?
    How bad do things have to get before this lot are voted out? The trouble is the British will probably vote for someone even more right wing if they tell convincing enough lies and have the majority of the press behind them.

    • Patrick as someone who works in a company that specialises in dealing with those in the Public sector, especially the NHS, the “myth” that they are poorly paid etc, is just that, it’s a myth. The contributions they make towards their schemes other than for those on bigger salaries has hardly changed, despite a massively increasing cost burden to the tax payer of supplying those schemes.

      Take for example the NHS pension scheme, the only really substantive changes to it to reduce the cost, has been the change from the 1995 version of the scheme, where NRD was 60, to 65 for the 2008 scheme, now state pension age for the 2015 scheme. At the same time when changed to the 2015 scheme it was changed to career average earnings (adjusted for inflation) over the older final salary version. That sounds like a good change? Well at the same time they changed it to a 1/54th scheme, with no cap on service.

      So now, we have gone from the 1995 scheme, which was a 1/80th + cash scheme with an NRD of 60, with maximum benefits capped at 40 years service, to a 1/54th uncapped scheme, with the only sop to the cost of it being the NRA being increased to state pension age and the “contributions” for high wage earners going up.

      Cleaners etc are no longer employed by the NHS, so other than clerical staff and the such as groundskeepers, the lowest paid staff are usually nurses. However like all public sector employers, earnings are partly down to the job you do, but also massively down to how long you have worked there, with guaranteed service related pay increases, such that in the literally hundreds of retiring nurses I have reviewed the pensions off, less than 5% are on a full time salary of less than £40kpa, most are on £40-50k FT equivalent and significant number are on £50-60k+ FT equivalent. The fact that they don’t get major promotions over the years, means that career average actually frequently works out more beneficial than a slightly lower acrual rate with a final salary link.

      So now we look at the contribution levels. Most will be on a 9.3% contribution rate, but given that they will also be into higher rate tax, the actual “net cost” to them becomes only 5.58%. So lets assume a starting pensionable earnings now of £28k and their actual contribution rate now is £1,562.40pa net. If we assume the equivalent of say 4%pa pay rises over their career and assume a 40 year service record by the time they reach their NRD, the total cost to them in 40 years time would be calculated to be approx £156,000. However by this stage, their earnings would now be approx £134,500 and based on that, (and assuming that the revaluation rate averages 2%pa) they would then receive a pension of approximately £71,682pa. Even if we assume that annuity rates had risen a little bit by then (seems unlikely) to say 3.5% for index linked annuity with the appropriate indexation, spouses benefits etc, the capital cost of that income would be £2,053,200. Yet they wont have even paid in 1/10th of that amount. Even if we assume that their contributions were invested throughout that period (which they won’t be, because the whole scheme is unfunded), if we assume that a net rate of return of 6%pa was achieved, then that would provide a fund of £429,000 after 40 years, compared to the cost of £2,053,000. Even if we increased the average rate of return to say 7%pa, then the fund still only reaches £531k. As such the actual funding level required as a “tax payer” contribution to make the numbers add up is at least 4 times the net personal contribution level in other words its 22%.

      So are you honestly trying to suggest that even with the changes, that this scheme is not MASSSIVELY generous and unsustainable by the tax payer, even before we take into account the unfunded nature of the scheme.

      Hell if we assume that 1.5m people work for the NHS at any one time and that this is the average (which is in reality much higher, because of the huger numbers paid large salaries) and assume an average retirement life expectancy of 30 years, this means that there will on average be 1.125m NHS pensioners at any one time, receiving an average of in todays terms circa £25,000pa each. So in todays terms, that’s going to cost the tax payer £28bn a year, just for NHS staff, now add in all the other public sector schemes, most of which are unfunded and the cost is going to be at least say £75bn a year, which is 14% of the total tax take! Just to pay out for public sector pensions..

    • Patrick,
      You obviously work in the public sector. Duncan’s excellent response to your note covers everything that I was going to say, but much more eloquently, so I will only add one observation.
      Most people that I know who work in the public sector spend more and save very little compared to people that I know who work in the private sector and who save more.
      This is not because they can’t afford to save, it’s because they know that they will get a decent pension when they retire. That’s fine, until we realise that the pension is heavily subsidised by the taxpayer, most of whom will not receive the same largesse when they retire.
      The public sector salary bill together with PSI are very large time bombs which will explode one day, with terrifying consequences for all of us.

  7. My comment on Pensions suffer death by a thosand cuts repeated here:

    What I find hard to come to terms with is the constant bleating by those in Westminster that we in the UK don’t save enough. But then they curtail, hamper and disincentivise those who wish to.
    Only recently Hammond was saying how important pension saving was to the UK economy. Three little words are just not in the politician’s lexicon – “joined up thinking”.
    All they seem to concentrate on is dragooning those with little or no money to reduce even further their already meagre disposable income, while at the same time chopping the legs off serious contributors.

  8. Hammond may not be perfect but who would you have instead? Corbynomics? Libdems? I don’t think anyone’s suggesting doing away with public sector pensions but new employees should be employed on affordable contracts. Patrick a lot of public sector workers have quite nice jobsall the paternity pay etc., early retirement options and still have the pensions my grandchildren will struggle to afford.
    The sooner final salary schemes are abolished the better. How different personal pensions would be if MPs had them! Pay everyone what they are worth and let them fund their own pensions.

  9. Spot on Harry – another 3 words that could also apply are ‘right first time’ – I fail to see why pensions are constantly tinkered with – since Aday it feels like nothing has stood still albeit for the first 2 perhaps 3 years thereafter – massive changes in policy over and again.

    Pensions are relatively simple (particularly since ‘freedoms’) what makes them complicated is the regulation and legislation which, every budget and autumn statement, typically gets changed.

    Even ISAs aren’t still fully grasped by the masses and they’ve been relatively static, regulation wise, for around 17 years.

    All the change lets myth and misinformation build – resulting in a lack of trust.

    Having said all that, one change I feel should be made is that pensions be used to fund care fees and in doing so, avoid tax on the income. It already applies to Purchase Life Annuities, why not apply it to drawdown and CPAs. From experience, people are reluctant to use their home to pay for care fees but I suspect using their pensions would be more appealing to some.

  10. I used to give advice on savings but because of regulation I no longer do so along with over a 100 Insurance companies that provided this service that no longer exist along with about 200000 advisers.
    Along this timescale the growth area has been in borrowing to buy stuff rather than saving for it.
    3% commission on savings advice is better than 5 to 4000% interest payable for borrowing. It may take another 10 years for them to work it out!

  11. @ Patrick Scan – Convert ALL Govt pensions to DC Plans, that would wake them up to the issues of ‘messing about with pensions’ year after year. Didn’t I read somewhere that a Govt employee was on approx £250,000 per year, got sacked and was immediately taken back as a consultant on guess what, £250,000 per year. I cannot remember a Council going into liquidation; no pay for employees, on the scrap heap at 60 and other employees struggling for work. i.e. Woolworths, BHS, Steel industry, Coal industry, etc etc.

  12. @ Patrick Schan. It has been well established that there is a pensions Apartheid. Even a nurse can end up with a pension that is larger than her final salary. The amount of sickies thrown by council workers is a well-known national disgrace. Other points have been well illustrated in this thread. You may be shedding tears for the public sector, but I suspect you are very much in a tiny minority.
    According to you “…lot of public sector workers do pretty crappy and difficult jobs on not such great pay in woefully understaffed conditions”. So? We live in a capitalist economy – no one forces them to take these jobs. They could always leave and find a job elsewhere – either here in the UK or even emigrate if they feel so hard done by. Cuba might be attractive, where doctors there earrn less than half the salary of our dustmen.

  13. The “Millennials” may have difficulty funding their pensions but they will be the big winners in the next few years in the mortgage market as house prices start to fall rapidly due to BTL investors offloading their stock. As the BTL tax regulations start to bite wealth will be transferred back from the “baby boomers” to the “Millennials”. At least the majority of this generation will now be able to purchase a property which can be used to partly fund their retirement. The “Millennials” and future generations will have a lot to thank David Cameron and George Osborne for, in changing the dynamics of the UK property market and creating a fairer society.

  14. Colin Cloy , couldn’t agree with you more , this article had nothing to do with public sector pensions !
    The balance between property and savings is so far out of control it is scary for all ,especially 20-40 year olds . With mortgage and rental costs taking so much of your income how can saving become a reality . Since 1998 we’ve had no long term house price correction , buy to let and low rates plus poor housing supply has distorted the market .without change to this there can only be an ever increasing gap between price and affordability .
    It won’t take to many interest rate hikes to set this in motion , this will assist new buyers but the pain on already struggling families will be intense .
    Anything legislative that can be set in place to assist must be seen as positive as long as it is fair for all .

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