Pensioners facing poverty

MILLIONS of workers saving for a private pension were warned on Wednesday that they could be better off rejoining the State scheme - throwing Government policy further into chaos.

It means their hopes of accumulating a better retirement income than the State offers may be shattered. And if they do move back, it would add £12bn a year to the social security bill - equivalent to 4.5p on the basic rate of tax. The prospect is a huge blow to the Government's aim of transferring more and more pensions provision to the private sector.

Those affected are 3.7m out of the 12m who have opted out of the State Earnings-Related Pension Scheme (Serps) - which provides a top-up to the basic State pension based on earnings and number of years worked. Such people are given National Insurance rebates, which are invested in personal pensions based on stocks and shares - which would hopefully provide a bigger return than Serps.

But now major insurers, including Norwich Union and Standard Life, are advising policyholders over a certain age they may be better off opting back into the new State Second Pension (S2P), which replaces Serps in April. S2P will provide more generous benefits than Serps to many low and middle-income earners.

Deborah Cooper, senior consultant of actuaries William M Mercer said: 'We estimate that for more than three million people there will be no benefit in opting out of the State system.' Mike Warburton, of accountants Grant Thornton said: 'The Government's pension policy is a mess. Millions of ordinary people can no longer work out the best pensions strategy for themselves and the danger is they will be put off the whole idea of saving.'

Jerry Barnfield, Norwich Union's director of pensions, said: 'Until now, we have suggested men aged 54 and women aged 48 should consider going back into Serps because there is not enough time for their pension to grow on the stock market. However, lots more people will now be better off with the State system. The risk of opting out is getting bigger because you are giving up a guaranteed State benefit for a stock market investment which is not guaranteed.'

Even people under 50 should consider opting back into the State system, says the organisation representing employers and pension funds. Peter Thompson, chairman of the National Association of Pension Funds, told its investment conference in Edinburgh on Wednesday: 'There is a case for people at younger ages to think about whether they should be contracting back in.'

Mr Thompson agreed that the rebates on offer for staying out and building a private pension have been generous, but they are no longer high enough. He said insurers are now frightened of being accused of mis-selling products if the contracted-out pension fails to match what the State pension would have provided.

Work and Pensions Secretary Alastair Darling admitted some people nearing the end of their working lives should opt back into the State pension. He said: 'Our aim over the next 50 years or so is to get more people into privately-funded pensions because we believe for moderately high earners it is better in the long term.'

Four years ago, Labour removed the tax relief which pension funds received on dividends paid by big corporations. This cost £5bn a year and is being partly blamed for the current crisis over final-salary pension schemes - which are being restricted or closed by many leading companies amid fears that they will not have enough money to finance them. Mr Darling denied the tax decision contributed to the current chaos. He blamed the underperformance of some private schemes on poor stock market returns and the fact that people are living longer.

Tony Hazell

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