Politicians are often derided for not knowing the price of a pint of milk or loaf of bread. But last week the shadow secretary for work and pension, Rachel Reeves, got into hot water for underestimating how much the state pension pays out.
Rather than simply showing how out of touch politicians can be, her answer—that it was 'just less than £100 a week'—also reveals the complexities of our current pension system.
The basic state pension is in fact £113 a week, although many receive more as they are entitled to additional payments though the State Second Pension (formerly Serps). According to Tom McPhail of Hargreaves Lansdown, the average state pension payment is £122.73 a week, with around a quarter of the UK's 12.9 million pensioners receiving more than £150 a week. Not all qualify for the full basic amount of £113 a week, however, as they have made insufficient National Insurance contributions.
Knowing what pension you will get will become easier for those who retire after 2016, when the new flat-rate pension—worth around £145 a week—is due to be introduced. Of course, those retiring before then will be stuck on the old system. But while there may be greater clarity about what you’ll get, it is far less clear when you'll be able to claim it.
The current state pension age is rising and it is expected that this process will be accelerated and extended in the next Parliament. As McPhail points out: "Rachel Reeves won’t get her state pension until she is 68, in 2047. However, by then we expect that the retirement age will have increased again."
The state pension is often described as the bedrock of pension planning, albeit one with shifting foundations. For those who are unsure about what they might get, and when, it becomes more important to build private pension savings through workplace schemes or Sipps (self-invested personal pensions).
The Government has made both options easier and more attractive: auto-enrolment will give many lower paid workers access to a workplace pension for the first time, while new pension rules give people far more flexibility as to how investors access and spend their pension savings.
While these reforms have been broadly welcomed, new research shows that yet more changes to the pension rules have only served to confuse many investors. A survey for TD Direct Investing found that less than a third of adults expected to benefit financially from these rules changes, with just over half (51%) saying they found them confusing.
Separate research by retirement specialists Partnership has found that people nearing retirement were under-estimating the money they'd need to meet day-to-day living costs.
Partnership research claims that to meet essential costs while also enjoying some discretionary expenditure, retirees need to target an income of around £14,600 a year, but this is currently around 10% higher than the average UK pension income.
Regardless of whether you'll get £100 a week from state pension, or closer to £150, it is clear neither will provide anywhere near the income Partnership estimates you'll need. At £150 a week you will get just £7,600 a year, which is unlikely to cover basic day-to-day expenses according to Partnership's calculations.
Politicians, like Rachel Reeves, do at least have generous public sector pensions to fall back on. For the rest of us it is a case of saving what we can, when we can. The endless pension changes in recent years may be confusing but the recent ones have improved the savings landscape and people need to grab this opportunity with both hands.
John Tracy, head of TD Direct Investing Europe says: "The new pension rules are a great step towards empowering people in the UK to make their own investment decisions. But more needs to be done to educate consumers on how to get the best results from their savings - and their pensions."
