THE AGE FOR PENSIONS
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by John C. Vann As inflation bites deeper into our pockets, concern mounts for our old age.
Aimed at helping to alievate these fears, the Government is introducing a completely new system of pensions schemes. Here we aim to guide both employer and employee to the schemes best suited to individual needs and circumstances
PENSIONS have been kicked around like a political football over the past few years. The Conservatives did their best by introducing the Social Security Act in 1973 which was to be effective in April 1975. But with the coming to power of the Labour Government in early 1974, the previous Act was shelved.
What has now emerged is the Social Security Pensions Act 1975. The principles contained in this Act have been accepted by the major political parties and it seems unlikely that any possible change of Government would materially alter the provisions of the Act or delay its commencement. The big day is set for April 6, 1978.
The basic philosophy of the country is that from April 1 978 every employee will be entitled to two pensions. The flat-rate old age pension is familiar to all of us. This is to remain and may be referred to as the basic pension. From November 1976 this pension will be El 5.30 for single persons and £24.50 for married couples. The qualifying age is 65 for men and 60 for women.
In addition, there is to be a second pension. Employers have to make a decision here, on behalf of their employees, as this extra pension may come from either the State scheme or from an occupational (or private) pension scheme. This can be quite a tricky decision, as so many factors enter into the reckoning for the conscientious and responsible employer.
Especially in these inflationary rampant days, cost will obviously have to be carefully considered. Another major point to be considered is the scale of benefits or, in other words, how good the pension .scheme is going to be.
Before we proceed any further, let us look at current costs and then go on from there. At present employers pay 83/4 per cent of each employee's earnings up to a ceiling of £95 a week (to be £107 a week from November 1976), with employees contributing 53/4 per cent of earnings in the same range: The ceiling is seven times the basic single person pension.
From April 1 977 employers have to bear a two per cent surcharge, increasing their contribution to 103/4 per cent. The estimated total contribution from April 1978 is set at 19 per cent. Employers will pay 121/4 per cent and employees the remaining 634 per cent — that is, unless any further amendments come along.
All the contributions so far mentioned apply to the full State scheme, ie to the basic pension and to the State scheme second pension. If an employer elects to enter his employees for the State scheme second pension (the basic _pension can come only from the State scheme), this is known as contracting-in the State scheme.
However, if an employer decides to arrange an occupational pension plan instead of joining the State scheme second pension, an abatement of 7 per cent in contributions to the State is allowed. The employer's contributions are reduced by 41/2 per cent and employees' payments come down by 21/2 per cent. This is called contracting-out of the State scheme.
What benefits are given under the State scheme second pension? Employees will be guaranteed a pension of 11/4 per cent of each year's earnings between the base and ceiling levels for each year from the start of the new scheme. The maximum obtainable has been fixed at 25 per cent after 20 years, which means that nobody can reach this maximum until 1998 at the earliest. Of course, people who are under the age of 45 in April 1978 will have to pay in to the State scheme for more than 20 years, yet the maximum of 25 per cent still applies. But the pension will be based on the employee's best 20 years' earnings.
One haulier with whom I discussed this subject recently asked for a practical example, "What kind of total pension will one of my drivers draw under the State scheme when he gets to 65?'' he wanted to know, We'll assume the driver is 45 years old in April 1 978 and that he will be earning £100 a week when he retires at 65, at which time the basic pension is £28 a week for a single person (which is another assumption). Well, on top of his base pension of £28 a week he will draw 25 per cent of the difference between base and ceiling levels, ie between £28 and £100, which works out at £18 a week. His total State pension would therefore be £46 per week.
This pension would be slightly less than half his final earnings. Some people might consider this fairly reasonable, while others might well think it ought to be much higher. The snag with the State scheme is its rigidness. It's a case of 'take it or leave it' as it stands. There is no opportunity to exchange part of the pension for a lump sum, as there is under many good occupational pension schemes, and neither is there a chance to retire early on a scaled-down pension, as could be arranged under a company plan. The attraction of an occupational pension scheme is its flexibility. The benefits and contributions structure of a contracted-out scheme can be tailored to meet individual circumstances, the employer retaining control over his own scheme. But a good occupational scheme is likely to cost more than the 7 per cent which is allowed for contracting-out of the State scheme. Just how much more depends, of course, on how good the scheme is.
Pension schemes are not magic. You get what you pay for. As a precautionary mea sure, minimum benefit requirements are laid down for occu pational schemes to ensure that employees will not be worse off than if they participated in the new State scheme.
For firms with only a small number of employees, say under 20, there is little doubt that contracting-out will normally be inappropriate. How ever, what such a firm could do would be to contract-in the State scheme and also arrange an occupational scheme on modest lines to top-up the State benefits as required.
Topping-up arrangements can be used to augment the pension benefits and they can also be used to provide benefits in areas in which the State scheme is inadequate. For example, lump sum death-inservice benefits can be arranged together with lump sum benefits at retirement, not forgetting extra widows' bene fits. All in all there is wide scope for the employer whose business is not big enough to allow contracting-out (or who feels for other reasons that contracting-out is not for him), to provide occupational scheme benefits for his employees by augmentation.
Many people are fearful that inflation will severely eat into pensions. But this factor has been taken care of, as pensions are to be fully protected against inflation. Not only will the lower and upper earnings levels increase from time to time as the basic pension increases, but the earnings on which the pension is calculated each year will be revalued in line with the growth of earnings generally up to retirement age. After retirement, the pension will increase regularly in line with rises in prices.
Strange as it may seem, full tax relief is allowed on employees' contributions to an occupational pension scheme, yet no tax allowance is given on contributions by employees to the State scheme.
In this age of equality of the sexes, all females employed in any way in the haulage business will no doubt be pleased with the 'equal access' rules regarding pensions. From April 1978, entry to all occupational pension schemes must be open to men and women on the same terms as regards age and length of service and whether membership is voluntary or compulsory. However, levels of benefits and retirement age need to be brought into line.
If an employer decides to contract-out his employees from the State second pension scheme, before applying for a contracting-out certificate he must give at least three months notice of his intention to the employees concerned. He must give similar notice to recognised trade unions and he must also consult all such unions concerned.
Self-employed
What about the selfemployed? Well, the contributions to the State scheme merely qualify self-employed persons for the basic old age pension, the second pension does not apply to them. The self-employed have to make their own private pension arrangements if they wish to draw more than the old age pension when they retire. Fortunately, several attractive taxfree self-employed pension schemes are on the market. Up to 15 per cent of earnings or £2,250, whichever is less, can be paid annually into a pension scheme. This is an opportunity which no self-employed person should miss.
Without a doubt, pensions is not an easy subject. Hauliers and other employers should• therefore obtain expert advice• before coming to a decision.• Insurance brokers and pensions• consultants can give a wide range of advice; their particular strength is their knowledge of the different terms and contracts offered by the various insurance companies. The cost of their advice is usually paid for indirectly as their income is mainly derived from commis-. sions paid by the insurers. It is advisable to contact a broker, who specialises in life and pensions business.
Finally, April 1978 may seem quite a way off. But employers should not delay in considering pensions and reaching a decision, as there is bound to be a great pensions rush in 1977.