Saturday, 3 December 2011

Government Delay Private Sector Pensions: "Devastating" For Younger Workers

The Government's decision to delay the new national pension scheme (Nest) will have devastating consequences for young workers.

The Daily Telegraph reports that the Government's decision to delay the new national pension scheme (Nest) will have devastating consequences for young workers.

While most attention focused on this week's disclosure that everyone born after 1960 will have to work one year longer before receiving their state pension, an apparently technical statement sneaked out on the eve of the Autumn Statement will hit millions of young and poor people much harder.

They are the groups most likely not to have any company or occupational retirement scheme if they work in the private sector. The poor are most likely to be excluded because of their lowly place in corporate hierarchies and, in any case, many struggle to make ends meet at the end of the month – let alone a working lifetime.

Young people often lack company pensions because they have more immediate concerns – such as paying off student debts – or they work for small or start-up companies that regard retirement planning for junior employees as none of their business.

More than seven million workers without any retirement savings were told three years ago that they would gain a legal right to have one from 2014 onwards. Better still, employers would have to contribute at least 3pc of payroll toward the new National Employment Savings Trust (Nest).

Now the Government has decided to delay implementation by one year. That may not sound like much but the power of compound interest means the cash effect will be substantial.

For example, as the graph illustrates, a 22 year-old earning £15,000 a year who delays starting a Nest pension by just one year will cut his pension fund value at the new retirement age of 67 by £26,000. A 22 year-old earning £25,000 a year who delays starting a Nest pension by a year will cut his fund value at 67 by £43,000.

That's a high price to pay for this young worker having an extra £600 before tax in his or her salary because they won't have to make the employee's 4pc contribution until one year later. The explanation is that they will also miss the benefit of the employer's 3pc contribution – £450 in this case – and 1pc tax relief or £150. Most importantly, these modest sums will then be denied the powerful effect of compounding over long periods of time.

That raises the more positive point that younger people are best placed to make the most of this week's bad news because they have time on their side. The same cannot be said for older workers without pensions who will have to wait another year before starting to build up the Nest egg.

Julian Webb of Fidelity Investments predicted that 50 year-olds on national average earnings could receive 10pc less pension because of this week's about-turn by the Government. He said: "Delaying saving for retirement is rarely a sensible decision and will result in lower incomes for some of the poorest people in society.

"The eventual result is that people end up needing more support from the state in retirement, which will further undermine the perceived benefits of these savings. In effect, the Government is foregoing future benefit savings to reduce employer and employee costs in the near term. This looks like borrowing by the back door."

Nobody needs to tell Michelle Mitchell, a director of the charity Age UK, about the reality of poverty for people who rely on state benefits. She said: "This is an extremely disappointing decision about Nest and one that will affect millions. It is appalling that many employees will miss out on at least a year's worth of contributions and a decent retirement."

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