Friday, 11 March 2011

Putting your feet up later

Which makes most difference: making you pay more into a pension, making you wait before you can take it or giving you measly increases?

With thanks to the pensions consultant John Ralfe, here is a closer look at the impact of Lord Hutton's recommendations for nurses, teachers and other public sector workers and their pensions.

Keep this big number in mind: £30bn.

It is the is the amount of unfunded public sector pension costs which build up each year, adding to the long term bill for the taxpayer. The official figure is £14bn but that is widely regarded as an underestimate.

This is reduced by:

£6bn from the switch to the meaner CPI measure of inflation from RPI to calculate annual pensions increases, implemented this year and unrelated to Hutton.

£6bn from aligning the normal age for taking a public sector pension (still 60 for many) with state pension age (rising to 66 in 2020, then to 68).

£3bn from making public sector workers pay another 3% of wages into their pension schemes.

£2bn from no longer offering Final Salary Schemes and providing Career Average pensions in future.

So the loudly fanfared switch to Career Average pensions has the least impact. The most significant Hutton reform by far, according to these figures, would be the tactic of keeping people in work longer.

Of course, it makes sense. Imagine someone who retires at 60, expecting at least 25 years on a pension. Take 5 or 6 years off that and you see a 20% reduction in the number of years the pension is paid. And there'll be another few years of contributions.

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