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No credit to Chancellor&#39s pension proposals

Industry commentators are usually loathe to knock Gov ernment policies which app ear to help the most vul nerable people in society but many have broken ranks to highlight the shortcomings of the Chancellor&#39s pre-Budget pension proposals.

Close examination of the report has led IFAs and pension experts to reveal a different story from the feelgood headlines in the national press.

They claim that, looking beyond the spin, it may not “always pay to save”, to coin a phrase from Social Security Sec retary Alas tair Darling. It is believed pensioners will need to accumulate a fund of £163;100,000 or more to make saving for ret irement worthwhile.

If their pension pot falls below this figure, many would be better off relying on the Government&#39s proposed £163;100 minimum income guarantee.

Experts also argue that the £163;100 Mig promised by 2003 will confuse and discourage low-earners from saving for retirement despite proposed pension credits designed to incentivise saving.

Figures from Wentworth Rose Ret ire ment Services based on standard annuity rates linked to inflation suggest a female aged 60 looking to provide £163;100 a week inc ome would need a pension pot of £163;100,000, while a 65-year-old male would need to have built up a fund of £163;80,000.

What this means is that, unless they can surpass these figures, their savings would have been nothing more than a voluntary tax as they would have been guaran teed £163;100 from the Government anyway.

An even more worrying picture is revealed by Scottish Life calculations based on the Government&#39s own example – 67-year-old Ivy who appeared in the pre-Bud get statement.

Ivy&#39s hypothetical case was used to demonstrate that it always pays to save. But Scot tish Life head of communications Alasdair Buchanan says: “What about Ivy mark two? Say there is a 56-year-old woman who sees the exam ple of Ivy and decides to scrimp and save and put £163;100 a month into a stakeholder with a 1 per cent annual management charge.

“She decides to retire at 65. So, based on 7 per cent growth, she has accumula ted funds of £163;18,100, giving her an annual pension of £163;1,120 and weekly pension of £163;22. This means she gets £163;77 a week basic state pension, topped up by the Mig to £163;100. She will also get a pension credit of 60 per cent of £163;22 which is £163;13.50 a week. So, Ivy mark two gets £163;113 when, if she had not saved, she would have got £163;100 a week. The Govern ment lets her keep £163;10,900 of her £163;18,100. This does not sit comfortably with &#39it always pays to save&#39.”

Sceptics might suggest the pension credit represents the sort of poor value financial services companies would be castigated for and merely shows the Govern ment will go to any lengths to ensure stakeholder is a success, whatever the cost to the target group. The target investor for stake holder cannot pay for advice and is in danger of being swept along in the spin or led along the wrong path by the much ridiculed decision trees. But if they could afford advice, many would change their minds and be better off for it.

Buchanan says: “Ivy mark two, for example, would be better off getting an Isa, not a stakeholder.”

How to convince people to put aside money for their ret irement is a problem Gov ern ments have wrestled with for many years. The fundamental issue relates to long termism. Opening people&#39s eyes to the fact that one day they will be old and possibly poor is challenging, especially when you are chasing votes.

The Government needs to think bey ond the next term and ensure future generations know how to ensure they are ade quately provided for, eit her by the state or through private funds. The two-pron ged app roach of the Mig and pension cre-dit does not solve this age-old problem.

Rose says: “The fact that many in the pension industry are still struggling to understand the implications of the Mig and the new pension cre dit on financial planning does not bode well for the person on the street who needs to dec ide whether it is worth saving or buying a stakeholder.”

The complexity of the new regime and inadequacy of stake holder decision trees remain a good advertisement for independent financial adv ice.


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