Every new law, regulation or budget proposal creates winners and losers. In the case of the new state pension programme, the Pension Policies Institute (PPI) think tank speculates that the losers are younger workers, the vast majority of whom will get less out of the new system than the older one.
The switchover to the new programme is scheduled so that anyone who retires after the effective date will come under the new pension system. Two thirds of workers in their thirties will lose an average of £17,000, while the remaining third will gain an average of £10,000, according to calculations made by the PPI.
But the potential loss for younger people doesn’t mean that it’s all champagne and roses for older workers or current pensioners.
Whenever the topic of pensions or other benefits comes up, it’s almost inevitable that sooner or later people will start pointing fingers of blame at someone. When people aren’t blaming the politicians and policy makers, they’re pointing fingers at a group of folks who are supposedly eating up all of the benefits and leaving little for anyone else. And in many cases the fifty-plus generation is the target of younger people’s ire.
They’re spending money like there’s no tomorrow, enjoying an easy retirement, whilst the younger generations are working two or three jobs and may never get to retire. Or so the story goes, in some circles, and quite often that narrative stems from the baby boomers’ tales of unimaginable bargains in housing, education, cars, and most everything else in the “good old days.” When an electricity bill today costs far more than a nice car did in the boomers’ youth, and a modest car today costs four times as much as the boomer’s house payments, it isn’t unusual to find one’s self waxing nostalgic. And let’s not even begin the conversation about the younger generation’s inability to afford current housing costs.
But the elders don’t necessarily have it so easy. Living on a fixed income can be enormously difficult, especially when one has to choose between paying the winter heating bill and putting food on the table. Some older Brits are struggling to make ends meet, relying too much on “alternative” financing such as high interest personal loans to cover daily expenses. To be sure millennials are also struggling and many rely on those same types of loans, but the point is that they aren’t the only ones. Taking out a loan to cover emergencies isn’t intrinsically a bad thing if done only once in a while, and only after careful comparison of lenders, but if it becomes a habit people can quickly find themselves in a debt hole. And in many ways, both the younger and older generations are equally vulnerable.
One could argue all day about who has it better or worse – millennials, baby boomers, or that “lost generation” in between the two – but the important thing to know is how the current crop of pension changes will affect you.
One item that has been the source of a great deal of confusion is the actual amount pensioners will collect. The two-tiered basic state pension was £115.95 a week prior to the switch to the new programme. As of the 6 April switch to the new flat-rate pension, the starting rate will be £155.65 a week.
While that does appear to be a nice little increase, it is based upon a worker having a minimum of 30 years of qualifying National Insurance (NI) contributions. Future pensioners will have to make 35 years of contributions to qualify for the starter rate. At any rate, it is estimated that only 13 percent of claimants will actually receive this amount in the first year, primarily because many people have contracted out of S2P and Serps over the years, and will receive a lower monthly amount as a result.
For many pensioners, the change in pension programme will be an exercise in frustration or even panic – panic that could have been avoided to a great extent by the government being more clear in its announcements about the new programme.
We don’t expect that the controversy over state pensions – or any other government benefits – will abate any time soon. Policies are always a work in progress. But we have to work with what we have. And learning the basics of smart money management can help anyone, young or old, avoid financial disaster, no matter which way the political and legislative winds blow.
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