Get ready for a new pension mis-selling scandal

If the Government doesn't reform the State Pension, it may have a crisis on its hands.

The world of pensions is never short of drama. There have been frequent scandals over the past couple of decades, from Equitable Life to Robert Maxwell’s plundering of the Mirror Group’s pension funds, as we detailed in The five biggest pension scandals.

However, according to one pension body, the Government’s big pension plans risk another big pension mis-selling scandal. The National Association of Pension Funds has warned that the Government’s NEST scheme poses a potential problem for low earners, which could see them lose out precisely when cash is at its most precious.

So what is the NEST scheme, and how could low earners lose out?

Building a NEST egg

The National Employment Savings Trust (NEST) is an initiative aimed at addressing the fact that many of us simply aren’t putting enough cash aside to cover for our retirement. It will require all employers to sign staff up to a workplace pension, which both parties will contribute to. And where there is no workplace pension, people will be enrolled into NEST.

The first companies are going to be signed up to the scheme in 2012, though it will take a good few years to get the system fully up and running.

For a full, detailed explanation of NEST and how it will work, have a read of The future of your pension.

The low-earner problem

There aren’t too many people who will argue against the principle behind NEST. Anything that gets all of us saving more (or even just saving at all) for our retirements has to be a good thing, and getting employers to contribute is a bonus that can make a huge difference in the long run.

However, the National Association of Pension Funds reckons the Government has overlooked a loophole which needs addressing. The trade body has warned that some people, particularly those on lower wages, will be auto-enrolled into a workplace pension, only to find when they leave work that they no longer qualify for certain means-tested benefits – benefits, like Pension Credits for example, that they would still have qualified for had they had the option of opting out of their workplace pension, leaving them worse off overall.

Of course, it will be a good few years before we can see whether the NAPF is on to something here, but it certainly seems a daft state of affairs that a scheme introduced to help all of us have more cash in retirement ends up penalising us for participating! And should this loophole not be closed in time, it’s not too farfetched to see a major scandal unfolding.

The solution

So what’s the way around such a problem? According to the NAPF, the solution lies in the reform of the State Pension.

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As things stand, the State Pension is £97.65 a week for individuals and £156.15 a week for couples – hardly a fortune.

The NAPF believes that the State Pension needs to be more generous, so that there is no longer a need for means-tested benefits. Last year it published proposals to combine the current basic State Pension and second state pension (what used to be known as SERPS, a sort of top-up to your pension) into a single ‘Foundation Pension’, which it reckons would be worth about £140 a week currently.

I really like this idea for a couple of reasons.

Firstly, the pension is more substantial – obviously a good thing! However, it’s also a far simpler system – the Government wouldn’t need to worry about the additional costs of working out which pensioners qualify for which benefits, while the pensioners themselves would not have to worry about applying for the benefits.

The simplification of the whole process would save money, which could go towards the State Pension payments, though whether it would result in a State Pension of the size the NAPF wants to see, I’m not so sure. Last year the Government did leak plans to go down this route, for a more substantial State Pension, so we can only hope that they follow through.

Doing it yourself

I like the NEST scheme because it ensures that all of us will at least have something set aside to help pay for our retirement. However, for many of us it is not enough to sit back and wait for the State to sort out how we will pay for our twilight years – we need to get engaged ourselves!

Related how-to guide

Get ready to retire

There are a lot of things to think about as you get closer to your retirement. But the early you start to prepare, the better.

See the guide

Starting as early as possible with a pension is not just a smart move – it’s essential, as the compound interest can make a big difference over forty to fifty years, even on relatively modest contributions. To see what a difference starting early on your pension can make, have a read of Boost your pension by £416,186! But don’t despair if you’ve been putting it off – it’s still possible, albeit more difficult, to build a sufficient pension pot in later life. Check out 5 top tips for pension late starters.

Of course, putting the money aside every month is only the start – you need to know where that money is going, and monitor its performance. There’s no point being a diligent saver, if your hard-earned cash is being squandered in an under-performing fund!

That’s why I’m a big fan of SIPPs, which allow you to decide exactly where your cash is going. Do it right, and it can even help you Treble the size of your pension.

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