UKIP State Pension Reform

UKIP State Pension Reform.

Economic spokesperson for the UK Independence Party (UKIP) has suggested that as parts of its 2015 Election Manifesto, UKIP would replace the current state pension system with a new system.

Currently, the UK state pension system is an ‘unfunded’ scheme. In simple terms, there is no money in the ‘pot’.  The tax and social security payers of today, see their money flow out in the form of state pensions payable to the pensioners of today, with a turnaround of around 6 weeks.  There is quite literally no investment base to the state pension system.

Whilst the proposals have not been adopted by UKIP yet, it is thought that the following would be the proposals:

• A National Private Pension Investment Fund is established
• At birth, the Government invests £2,000 for each child into the fund.
• During our working lives, both Employers and Employees pay into the same fund.
• The government would make further contributions of between £1bn and £2bn per year to boost the fund.
• If you leave the UK before age 25 your accumulated fund would be transferred back to the fund for the benefit of all.
• If you die before age 25 your accumulated fund would also be transferred back to the fund for the benefit of all.
• You will be allowed to draw down from the fund for major life events such as births, deaths, marriages, care.
• When you die, your fund can be inherited by your beneficiaries, we assume the fund would transfer inside the National Private Pension to them rather than to your bank account.
• You have the option at retirement to buy an annuity or draw down an income from the fund.

Comment

For certain countries such as many of the new sovereign states emanating from the old Soviet Union, individual states in the USA and indeed a sovereign countries like Norway, they actually have funded state pension systems.  For the UK and most of Europe and indeed the World this is not the case, they are usually unfunded or indeed not available at all.

The sheer scale of funding needed to deliver the State Pension system in the UK is unaffordable and clearly needs to be constantly revisited by the UK government, regardless of who is in power.  The current system was established back in 1949 when life expectancy was much lower, i.e. State pensions were designed to pay at age 65 as most people did not make it to 65.  Longevity has improved but the birth rate has fallen meaning there are less and less tax payers contributing to the costs of paying for state pensions for the increasing pensioner generation.

Given this, we cannot see any mileage in the above scheme, but at some point there does need to be a cut off where people born after a certain date form part of a different pension scheme before they enter the social security and work based pension system.  Social security contributions should be redirected but a valid solution needs much greater thought.  Even simplistic things like have property inside pensions, using your pension fund to pre-fund care etc. need including to encourage a greater savings habit.

Simply developing a funded system will not work for those of us who are paying today but will not have future generations paying for our pensions as is the case today.