I fully expect equality and fairness on pay and pensions, between the genders and generations, to be at the heart of future government policies, and so it should be. Advisers are well positioned to help people understand what changes already announced and likely future trends will mean for their clients’ financial futures.
Let us not forget the underlying good news here – on average we are living longer. The sting in the tail is that someone has to pay for that. With an ageing population, the government will be very conscious of the growing cost of state pensions, but cost-saving plans to remove the triple lock are now on the back burner.
The pay-as-you-go nature of the UK’s state pension means it is national insurance contributions from today’s workers that fund today’s state pensioners. So unless the state pension age is pegged to increases in life expectancy, pay-out periods will get longer and longer, placing an ever greater burden on those of working age.
For those clients who do not relish working into their 70s, the key message has to be to revisit the adequacy of private and workplace pensions to bridge the increasing gap before state pension kicks in.
Recent news concerning the Universities Superannuation Scheme’s record £17.5bn defined benefit scheme deficit also highlighted generational issues. One suggestion was that student tuition fees might be increased to fund the deficit. Defined benefit schemes have always involved cross-subsidies between generations, with a year’s extra accrual costing much more at 55 than at 25. But surely solving historic defined benefit deficits by saddling our future workforce with even greater student debt is a step too far – a case of robbing grandson Peter to support grandpa Paul’s pension.
Advisers will be only too aware of the huge challenge we face in encouraging younger generations joining the workforce to take pensions seriously. Substantial student debt with high-interest repayment rates and an increasingly daunting task of getting on the property ladder are just some of the challenges older generations did not have to face.
We need to get the message over that, despite the temptations, opting out of an employer’s pension scheme is not the right answer. Giving up employer contributions is turning down free money. Contributions paid in the early years have most to gain from investment growth, so opting out is doubly damaging for younger generations.
Intergenerational fairness will be a key factor in the promised government consultation on social care funding. As we live longer, more of us will need some form of social care in later life, but who should pay? I believe we need a clear, sustainable deal between the state and individuals, which is accepted as being fair between wealth bands and generations.
I also believe an overall cap on personal contributions is essential. This could open up a major new area for advisers to help clients plan ahead to meet potential care costs while protecting inheritance.
Key points
- Equality and fairness on pay and pensions should be at the heart of future government policies.
- Pension freedoms give people the ability to draw income to cover care costs.
- Stamp duty remains an important issue for those at both ends of the age spectrum.
There are those who advocate planning for social care costs through some form of protection policy or through a new form of standalone care Isa. However, we already have a solution, at least for those with defined contribution pensions. Pension freedoms gives people the ability to choose how and when to draw income.
