The Great Pensions Swindle

What's gone wrong with our pensions? And who's to blame?

Once upon a time, the UK had a pension scheme set up for the nation that was apparently the envy of the world. The deal we had with whichever government was in power was that we would work for most of our adult lives, bring up our children to the best of our abilities and pay our taxes -- some of which would be put towards financing our subsequent retirement. We were encouraged to save into our own pension funds too.

Unfortunately, over a quarter of a century, governments of various colours have tinkered with our mish-mash of pension schemes, including the State Pension, to such an extent that around half of today's pensioners now need to claim benefits in order to be able to afford to pay their bills.

It never used to be like this. Thirty years ago the State Pension rose in line with average earnings but the Tory PM, Margaret Thatcher, did away with that policy in her first year in office. Nowadays, the State Pension is so inadequate that today's Government tops it up with pension credits on a means-tested basis, and has decided we will eventually have to work until we're nearly 70 before we can even claim it.

The outlook for private or company pensions is equally gloomy.

It all started with the Maxwell scandal back in the early Nineties when the late Robert Maxwell was found to have stolen more than £400m from the 32,000 members of his company pension scheme. And then there was the near-collapse of Equitable Life who made promises they couldn't afford to keep to some of their policyholders.

And, of course, you can't have failed to notice that criticism is now aimed at the current Chancellor's infamous 'raid' on pension funds in his first year in office. Pension firms used to be able to claim back a 20% dividend tax credit which gave them about £5 billion a year to re-invest on our behalf. Unfortunately, Gordon Brown abolished this credit which means that £5 billion a year is now in his coffers rather than ours.

As a result it's estimated that the value of our pension funds has dropped by around £100 billion in the last ten years although part of that can be attributed to the dot-com crash in 2001. Many pension funds also switched significant portions of their assets from shares to bonds at the wrong time. To cap it all, people simply don't understand pensions.

The main incentive to pay into a pension fund is the tax relief you get on your contributions. For basic rate taxpayers this currently amounts to 22% but bear in mind you'll be taxed on that when you start receiving it. The benefits appear particularly good for higher rate taxpayers who get 40% tax relief. Throw in an employer who's also making contributions on your behalf and it's an even better deal.

On the face of it, we should take advantage by saving into pension schemes, but one wonders sometimes whether it's worth the effort when the goalposts get moved every five minutes.

About four years ago, I wrote an article also entitled 'The Great Pensions Swindle' and followed it up a week later with 'The Pensions Swindle Revisted'. Re-reading it now it would appear that I was rather angry with the system at the time. Plus ça change!