Tag Archives: pensions

WEALTH WARNING!

Chancellor #Gideon is considering scrapping tax relief on Pension Contributions but then allowing tax-free access to savings upon retirement. This should be resisted by everyone. Not only is it a bad idea, borne of Treasury short-termism and a Chancellor with a singular lack of imagination but it is also a con…..He obviously has not learned the Tax Credits lesson and is obviously in a hurry – before the UK economy ‘tanks’ again.

Pensions? Bored –itless!

WARNING: IF YOUR ATTENTION SPAN IS NORMAL OR IF YOU ARE OPERATING MACHINERY, PLEASE DO NOT READ-ON. THE FOLLOWING SEVERAL HUNDRED WORDS ARE ABOUT PENSIONS AND THEREFORE CAN INDUCE DROWSINESS.

There is one group of unfortunates that you definitely would not want to go for a drink with – primarily because they are soooooo boring – accountants and of course their close relative the actuary. However, there is yet another growing group. They don’t get a hard-on at the sight of a column of figures or moan when touching a spread-sheet. This lot is turned on by just one word. If you want to excite this one  just say “Pension”. Yes, the Pension expert.

Many years ago I have to admit that a small part of my job was to train people in the dark arts of pension provision. The rule was simple, no matter how little I knew about pensions, it was 100% certain that there would be no-one in the room who knew more than me.

I am quite confident when I say that there isn’t a single person (or expert) in the land who knows everything about pensions. Pensions experts are usually expert in only one or two damp corners of this huge subject.

Even nowadays I go quite misty-eyed at the thought of the good old Section 226 pensions which were introduced in the 1970 Income and Corporation Taxes Act. Since those days, pensions have become over-complicated and improvements to IT systems have allowed them to become almost incomprehensible for all except just a few “chosen ones” – most of whom could bore for England. 

But before I become over-excited you may wish to know the reasons these sudden admissions and reminiscences.

It’s because pensions are once again on the political agenda and pensions experts are  being revived and  brought blinking into the daylight as they are hustled into television and radio studios to dispense opinions. Pensions are once again being discussed at the highest political level. We are going to see more changes because the government thinks that it will be a good idea to reduce its costs by abrogating its responsibility towards the retired by putting the onus on employers and the employed to arrange their own pensions. Various “carrots” have been tried over the years without too much success so, as we seem to have entered  the Age of the Stick, there is no reason for pensions to escape punishment. 

The government’s pensions pronouncement looks suspiciously  like a half-baked idea, put-together on the back of a Malborough packet after closing time in some seedy Westminster hostelry. 

Let me give you some background.

One of the phrases you always hear is that pensioners are “entitled” to X amount of pension and exactly how much they receive is somwhow linked to their National Insurance contributions.

As recently as twenty five years ago, National Insurance was quite a simple idea which worked and there is no real reason why it should not be working today.The concept of a National Insurance Fund was created in the post-WW2 Beveridge report. Employees, employers and the self-employed contributed to the fund through National Insurance Contributions and the fund was used to pay the old age pension to men over 65 and women over 60. There is one further important  point  –  NI contributions are not a tax and therefore are not available to the government for day-to-day general expenditure.

Contrary to accepted wisdom and government hysteria “The trouble is that we are living too long” etc., the National Insurance Fund achieves an annual surplus (about £2 billion) and by next year (2011) that surplus will be well over £100 billion. The month-by-month balance of the National Insurance Fund (NIF) used to be available HERE but the figures seem to have disappeared.

The government is NOT supposed to plunder either the NIF nor the surplus as a result of the GOLDEN RULE. The Golden Rule was adopted by Chancellor Gordon Brown and is meant to be a guide to fiscal policy (how the government’s expenditure influences a country’s economy). The rule is simple: A government will borrow money only to invest and not in order to fund expenditure. Investment is money which will benefit future generations and expenditure is that which benefits the current population. The latter  must (should) be paid for with taxes.

 The National Insurance Fund surplus should NOT be used by a government to fund current expenditure

National Insurance is not a tax and was designed for a specific use which was  (and still is) the payment of  pensions. It is widely suspected that Gordon Brown ignored the Golden Rule because the Labour Government’s expenditure was such, that more and more government borrowing was necessary and everything, including the National Insurance Fund became fair game.

In short, there is a pensions shortfall only for one reason. Government over-spending driven by misplaced ideology resulting in the plundering of the National Insurance Fund.

The NIF was totally distinct from the Treasury’s taxation income but now it would seem that every goverment revenue stream is “up for grabs” as a potential amount of cash to be used for any purpose whatsoever.

In short, there IS enough money to pay UK pensions and if there isn’t,  it is because the government has behaved improperly. Even if the government has squandered the National Insurance surplus, the Fund is what is known as a “put-and-take” fund, so there will always be enough to pay pensions. The fund is constantly being “topped up” by NI contributions and then the money is withdrawn to pay pensions.

If there is not enough to pay pensions to the retired, the only adjustment will be an increase in National Insurance contributions. In short, we’ve been robbed and once again we are being asked to pay the price.

Anyway, back to the pensions bores who are being wheeled out. They are asking the wrong questions and one wonders whether either they don’t know which questions to ask or whether they have been pre-programmed.

One government pensions adviser who will be on our screens for a few weeks is the same adviser who advised Gordon Brown. She should know what is going on but even she has not asked any questions about the National Insurance Fund.

Post-Maxwell, all pensions are held in trust so that employers cannot plunder the pension funds for their own purposes. It’s time that similar rules applied to the NIF.

One presumes that the Government new MM Pension (yes, that’s Mickey Mouse) is portable, i.e. transferable between trustees – or is the new pension not to be held in trust? Can you imagine the admin if someone moves jobs several times in a short space of time?

….and the pensions experts will drone on.

I’ll stop now because I’m bored – but outraged.

(The concept of a trust is an old one, dating from the times when wealthy families would leave their assets under the guard of someone they trusted, with clear rules about the release and distribution of the funds. Trusts are commonplace nowadays, not just for pensions, but also for inheritance purposes, or to provide for children when they are older. A trust is a way of protecting funds and is essentially the vehicle that moves the money from the giver to the beneficiary. Well-off people use a trust as a device to keep money out of a will so that it is not subject to Inheritance Tax. Ask any Cabinet member)

Local authority Pensions scandal.

There has been talk recently about the ridiculously high salaries that some Local Authority employees are enjoying. There is another issue which, because of its somewhat technical nature , is not often discussed. It is the way that Local Authority pensions are administered.

Most of us have heard about the so-called Final Salary Pensions – they are also sometimes known as Defined Benefit schemes. They are called that because an employee knows how much pension he or she will obtain or retirement  and how it will be calculated.

The amount of pension depends on the salary in the last year of service – the year leading up to retirement. It is paid as a proportion of that year’s salary and depends on the number of years service.

What is not generally known is the fact that pensions are very often artificially boosted by two main methods – the first may be construed as “naughtiness with intent” and the other one seems quite OK but is sometimes abused.

Let us assume that the final year’s salary (in the year before retirement) of the Head of Meetings at Smallville City Council is £150,000 and that his pension, based on service should be £75000. The first scam is that in his last year he is given a couple of spurious additional jobs and job titles which increase his final year’s salary by say, £30,000. His final year’s salary becomes £180,000, thus making his pension £90,000 per annum.

Secondly, an employee can purchase “added years”. That simply means that if he has worked for say 30 years , for a small outlay, he can buy fictitious years which make his length of service look longer for the sake of the pension calculation. That 30 years can become 36 years! If he or she opts to purchase “additional years” and then suddenly retires through ill-health, then that benefit is preserved in the pension calculation even though it has not been fully paid for. There is also the scope to add these years for the sake of a pension calculation when an individual is made redundant. 

Have you noticed the high number of “ill health” retirements among public sector workers?

The rules are changing very soon but instead of added years employees will be able to boost their pension by as much as £5000 per year.

I think that it would be an excellent idea to look into how public sector executives’  salaries increase in their final year of service.

Strange how private industry is having difficulty in funding this type of pension whereas the Public Sector employees have a seemingly bottomless pit funded by tax and local rate payers.