Keeping up-to-date on pensions
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by John C Vann
AFTER the introduction of the Social Security Act 1973 there as a tremendous amount of activity in the pensions sphere — even though this Act was not to be effective until April 1975. Among other things, the Act brought in the idea of a second pension to be additional to the basic or old age pension.
But the new administration after the February 1974 election changed the rules of the game in several directions. The changes have not made it any easier for employers or employees, as the absorbing and understanding of new regulations is invariably time-taking.
An operator even asked me recently: "Is the old age pension to carry on?" The answer is yes, but the scheme is being modified. The fiat-rate benefit is to continue — that is, all contributors receive the same pension, the current weekly rates being £10 for a single person and £16 for a married couple. But the flat-rate contribution is being replaced from April 1975 by an earnings-related contribution. In other words, the higher an employee's earnings, the more he pays, though there is a maximum of approximately 11/2 times the national average earnings. The present ceiling is £69.
Payroll deduction
"How about costs?" Well, the National Insurance stamps are being scrapped and in addition the graduated pension contributions will be no more. Instead there will be a payroll deduction. The total contribution is to be 14 per cent of relevant earnings (those earnings up to 11/2 times the national average). Employees are to pay 5.5 per cent of earnings, apart from married women who are to pay 2 per cent, with employers contributing 8.5 per cent of the payroll.
So much for the basic or first pension. The present administration has clung to the idea of a second pension but on different lines from the one worked out under the Social Security Act in the form of the reserve pension scheme. This reserve scheme has, in fact, been abandoned and replaced by a totally dif ferent plan which is to be introduced not later than April 1978.
On present indications, it could be that April 1977 (or an even earlier date) will see this second pension scheme in operation. It will relate to earnings in excess of £10 and up to £69 a week, the latter figure approximating to 1½ times the current national average earnings. However, both these lower and upper earnings limits will be reviewed in the light of movements in national average earnings.
"Will this second pension be worth much?" It will be 1/ 80th of each year's earnings for the employee, with a maximum of 20 years counting.
Best 20
This does not mean that after paying in for 20 years an employee is then exempt, unless he has reached retirement age. However, although employees will continue to be liable for contributions throughout their working lives, the new pension will be based on a contributor's best 20 years of earnings. For this purpose, when pension age is reached, each year's record of earnings will be revalued in line with the increase in the general level of earnings which has taken place, assuming the upward trend continues. From this it will be seen that the maximum second pension is 20/ 80ths or 25 per cent.
It is difficult, if not impossible, for anybody to forecast what amount of pension is likely to be payable in, say, 10 or 20 years' time, owing to the effect of inflation. But it can be expressed in general terms. An employee's earningsrelated total pension will represent 100 per cent of his average weekly pay up to the base level, plus 25 per cent (assuming he qualifies for the maximum) of his average earnings between the base level and the scheme's ceiling.
The base level, when the scheme is introduced, will be the amount of the single flat-rate pension then in force and the ceiling will be seven times that amount.
To take an example, purely as a guide, if a single man or woman with average earnings of £40 a week had been contributing to the scheme (had it been operating) for the past 20 years, t weekly pension payable today would £17.50 in total. This would be made of the basic £10 plus 25 per cent of £ (the difference between £40 and t basic £10). Assuming the same avera earnings, for a married man on 1 contributions alone, a sum of £6 wot be added for his wife, thus giving a to pension of £23.50. This married n pension would be increased if the w had been earning.
' The minimum pension age NA remain at 65 for men and 60 for wom( Those who go on working past thc ages will cease to pay contributions a will earn extra pension for every yt they remain at work up to 70 for a m and 65 for a woman. The level at whi the earnings rule affects pensions continue to be reviewed regularly.
The cost of this second pension pla At this stage it is estimated that the per cent already mentioned in conna tion with the basic pension will incrm to 16.5 per cent to accommodate t second pension arrangements. Of th employees will pay 6.5 per cent (an exi 1 percent) and employers 10 per cent ( extra 1.5 per cent). Thereafter it expected to increase by a half per cc within 10 to 15 years and to reach If per cent in 30 years.
Contracting out
Although participation in the ba! pension scheme is to be compulsory, at present, contracting out of the St second pension arrangements is to permitted. However, in its pla employers will have to provide occupational or private plan at lez equivalent to the State scheme benefit An occupational scheme will gi members better and more flexit benefits, but it is likely to cost t employer More than the State secm pension scheme. The actual cost w depend on the benefits selecte Obviously, the better the scheme, t: higher will be the cost. If the cost of scheme is the major problem, al employer who wants a minimum cc scheme should go into the State schen But expert advice should always 1 taken before a decision is made.