Beware of being average

Many of the 5 million workers affected by the public sector pension changes could face much bigger hikes in their contributions than they expected.

In the bewildering swirl of figures, there's a danger of being flummoxed by the use of averages.

On average, for instance, pension contributions will be 3.2% higher, which is a lot more than it sounds.

What it means is that contributions might go up from around 6% of earnings to around 9%, though the exact numbers depend on the job.

But Danny Alexander, the Chief Secretary to the Treasury is promising today that 1.25m workers will have no increase or a very small one -- those who are earning less than £18,000.

The implication is that those earning more than £18,000 will have to stomach increases of a lot more than 3.2% in order to make that average figure work.

So how many will end up paying more? Could be millions.

Osborne's No-Budge Budget

The Chancellor isn't expected to budge on cuts or raising tax, save for some tinkering round the edges and a rethink on fuel duty.

In fact today's news that inflation is rising even faster, now reaching 4.4% (or 5.5% on the RPI measure), limits Osborne's room for manoeuvre because any retreat from his hard stance might add to pressure on the the Bank of England to raise interest rates.


Fuel duty.
Due to go up by inflation plus a penny, the fuel duty escalator.
Will he forget about the 1p, or forgo the whole increase, or postpone it, staggering the hike over the rest of the year?

Duty on booze.
Will Osborne bottle on the other duty escalator?
A rise of inflation + 2% is pencilled in, which might mean 3p on a pint, or even more once suppliers add their mark-up.
One populist measure could be to forgo some of the increase.
He is likely to announce a lower rate of duty for weak beers and a higher rate for strong beers.

Lots on pensions.
More detail expected on a £140 flat-rate pension, planned for 2015.
Reaction to Hutton Report on public sector pensions.
Possible mention of giving pension savers early access to their money.

Junior ISA
At new tax-free savings scheme has been promised for the autumn. More information is expected.

Unifying Income Tax and National Insurance
Let's face it, this would be terrible news for pensioners if it was done crudely, because there's no National Insurance on pensions.
The Office for Tax Simplification said it might be a good idea, so expect a study.
The OTS also wanted a review of inheritance tax.

Air Passenger Duty
There have been rumours of a freeze, to soften the impact of fuel surcharges on holidaymakers.
And maybe there'll be an update on per flight duty to replace Air Passenger Duty (promised in the coalition agreement).

Crackdown on cheap CDs
He could close the VAT loophole for CDs, DVDs costing under £18 from the Channel Islands. Costs £130m a year.

There are lots of changes already happening in April. The ones he'll wanted to re-mention are:

*Personal allowance rising to £7,475 from £6,475, to £10,000 in 2015-16
*Corporation tax cut to 27% from 28%, small profits rate to 20% from 21%
*£50,000 annual limit on pension contributions.
*5% stamp duty for £1m homes

He might want to gloss over:

*National Insurance going up
*Benefits and tax credits only increased by CPI
*40% tax threshold lowered

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.