State Pension Affordability

[Protagoras]

Closing a Ponzi scheme is expensive in the short run, but I think that in order to ensure a state pension for future generations, this is going to have to be tackled at some point.

I think it's truly bonkers to have the state pension higher than the personal allowance. That's got to be costing a fortune in pointless admin adding to HMRC's workload. I think ideally state pension should equal NMW and both should be somewhat under the personal allowance - even if that means higher marginal tax rates beyond that.

The Dutch system looks to be a good model and one in which the basic state pension pays out around NMW and is based on residency. The idea is that this is supplemented by occupational and private pension savings. Monthly state pension there is about €1.7k for a single person and €1.2k each for a couple and is adjusted bi-annually. That said, the basic state pension is still funded by current revenues.

On a personal note, it was only contracting that makes retirement attainable. No way could I have saved as much working as an ordinary employee especially with the state pension age increase and so-called 'fiscal drag'. But I suppose I was in the fortunate position of having lowish outgoings so I could afford to pay into pension and take less income.

[malvolio]

All I know is that I take the old state pension and a private one roughly of the same gross value. Paying for the latter as an annuity takes the return on a sum rather more than my NICs paid in over my working career.

OTOH I have second small private pension scheme out of a £3k payment taken out under the old Section 226 scheme many years ago that I had forgotten about, where the supplier is paying me a couple of hundred pounds a month for ever (as far as I'm concerned anyway) out of a fund worth barely five figures.

Luckily for us both, SWMBO benefits from a sensible pension paid for out of the old final salary scheme from her near 40 years' in the NHS. So for now we can live comfortably, if not lavishly.

And while there is a very strong argument for setting the pension and the tax free allowance at the lowest of the various Minimum Living Wage figures, it is simply unaffordable in the current economic model - which isn't about to change, sadly.

[ladymuck]

The UK state pension is a classic Ponzi scheme with the people currently paying in funding the drawings the retirees take out.

There's lots that could have been done, like set up a sovereign wealth fund when oil was discovered in the north sea, for instance, but such forward thinking has never been a feature of the UK government (regardless of which badge it wears).

[NotAllThere]

You'll love this. As a British citizen living abroad, I only had (it's changed now) to make class 2 contributions. About £200 a year, to keep my full contributions. Now it's about £1000, as the government changed the rules so it must be class 3. We've kept up our contributions, so when we retire, we'll both get full pension. By 70, I should be getting more out than I put in.

In another country, the amount of pension isn't only based on number of contributions, but how much. I'd recommend the UK try it.

[Protagoras]

There's an ongoing debate about the affordability of state pension, so just out of curiosity I was looking at the value of my state pension (due in a few years) vs the employee contributions made. There were a number of student years where I made no contribution and received credits.

At a discount rate of 5% (roughly the long term UK interest rate) the PV of employee contributions at state pension age will only be £170.4k. With full state pension entitlement I reckon I need to reach about 80 to break even on the employee NI payments.

Now I realise that this is a sample of one, but given that I've not included employer contributions this hardly looks unaffordable to the treasury if NI contributions had been invested. Ah, but they're not invested, they're treated as current revenue, aren't they?