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Last Updated: Tuesday, 5 April, 2005, 11:09 GMT 12:09 UK
Election issues: Pensions
ANALYSIS
By Richard Scott
BBC News personal finance reporter

Pensioners protest earlier this month
Pensions are likely to remain high on the political agenda
The basic problem with pensions is that we're all living too long.

Government figures predict a 65 year old in 2041 will have another 21 years to live - that's compared with another 16 years in 2001.

Assuming the individual retires at 65, that means the length of their retirement has increased by a third.

That is good news for the individual but bad news for those who pay for our retirement.

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The longevity problem has been made worse because pension income during retirement has been hit by falling investment returns on private pensions and the collapse of company final salary schemes.

Gordon Brown's 5bn annual tax raid on pension funds didn't help either, though it's worth noting that the Conservatives have ruled out reinstating those tax breaks.

The government has tried to help the latter by bringing in the financial assistance scheme and the pension protection fund, but the crisis in both private and occupational pensions serves to concentrate people's minds on what the state system is doing to help.

IS IT DEVOLVED?
Scotland: Not Devolved
Wales: Not Devolved
NI: Not Devolved
Devolved issues are the responsibility of the Scottish Parliament, Welsh Assembly, or NI Assembly

Longer retirements leave the government with two basic options. Keep increasing the pension budget, or opt for the more potentially painful course of pension reform.

Of the three main parties, the Liberal Democrats have the most radical ideas for the state pension.

They would change the basic state pension for the over 75s to a citizen's pension.

This would be based on residency, rather than national insurance contributions, and would benefit those who don't build up enough national insurance contributions to qualify for a full basic state pension - in particular, women.

The citizen's pension would rise in line with average earnings, rather than the less generous index of average prices as used by the current state pension, meaning pensioners would not become poorer relative to the rest of society as their retirement goes on.

The Lib Dems say single pensioners would get 109.45. They don't say though when the policy would be extended to pensioners under 75.

The idea of a citizen's pension, which everyone qualifies for when they reach retirement age regardless of their contributions, has also been endorsed by the Scottish National Party, Plaid Cymru, and the Greens.

Link with earnings

Unlike the Lib Dems, the Conservatives say they would keep the contributory system.

But they would also restore the link with earnings (abolished by Margaret Thatcher in 1980) so pensions rise faster.

They claim this would gradually lift pensioners out of the means testing trap caused by pension credit.

But since the pension credit is also rising with earnings until at least 2008, increasing the basic state pension by earnings as well won't make any difference until the pension credit's link with earnings is abolished.

The Conservatives are proposing extra pension benefits for basic rate, starting rate and non-tax payers. For every 100 saved into a pension fund, a Conservative government would add an extra 10. They say this would cost 1.7bn.

The Conservatives also say they'd cut council tax by half (up to a maximum of 500 saving) for households with adults over 65 in England.

Elderly woman with grandchild
The Lib Dems say their plans would particularly benefit women

Both the Conservatives and the Lib Dem ideas would cost more money, rather than cutting the state's bill.

They both say the proposals are fully audited and would be paid for by slimming down government.

They also both say they would abolish the requirement for people to buy an annuity when they retire with a personal pension.

Means tests

Labour has based its strategy around means-testing, using the pension credit to top up the basic state pension.

Means-testing is controversial though, as it can discourage saving.

Many pensioners also feel it is demeaning to have someone go through their accounts.

Help the Aged says that this is at least partly to blame for the fact that around one in three eligible pensioners not claiming the benefit.

But the pension credit does allow a limited pot of money to be targeted at the pensioners most in need.

In this way Labour says it has lifted two million pensioners out of poverty.

Labour says it's interested in the idea of a citizen's pension, and particularly in the way it would help women, but there's no commitment.

The Pensions Secretary, Alan Johnson, has also admitted that means-testing can act as a disincentive to save for some people - but again there are no planned changes.

At the moment Labour has just listed broad principles for pension reform, such as 'the pensions system must tackle poverty effectively' or 'public pensions provision must remain sustainable'.

Since the fundamental problem is people living longer, the logical solution would be to gradually raise the pension age so that the proportion of someone's life that comes after drawing a pension remains the same.

But it is unlikely any political party will be brave enough to go down this route before an election.

And before making any changes, the government will be mindful that the Pensions Commission is due to report its conclusions in the autumn, so if re-elected, Labour ministers are likely to wait for that report before embarking on any radical action.

Indeed, they have made it clear that any major changes in the structure of pension provision would require all-party agreement and would be unlikely to be introduced before the 2010 election.



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