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Tuesday, 22 May, 2001, 14:38 GMT 15:38 UK
Bridging the pensions divide

As Britain's population gets older, the basic state pension has been allowed to wither, widening the gap between rich and poor pensioners.

BACKGROUND

Despite an ageing population, Britain spends a much smaller proportion of its national income on pensions than other industrialised nations.

The basic state pension has been allowed to fall steadily in value over the past 20 years, ever since a Conservative government suspended the link between pensions and earnings.

Instead, pensions are adjusted for inflation only.

And more people have been encouraged to provide for their future through private and occupational pension schemes.

Because of this, the UK will probably avoid the 'pensions time bomb' which threatens to destabilise public finances in Japan, France, Germany and other countries with a greying population and a heavy commitment to state provision.

But the gap between rich and poor pensioners has grown dramatically in the UK as a result.

Currently, one-in-six pensioner couples retire on more than 400 per week, according to figures from the Department of Social Security (DSS).

But at the other end of the scale more than 1 million (nearly a quarter of all single pensioners and 8% of pensioner couples) are effectively on the poverty line, relying on benefit payments to top-up the basic state pension of 67.50 a week for a single person.

The government has increased means-tested help for this group through the minimum income guarantee. But the opposition parties say this has made the problem of take-up and stigma much worse.

Many pensioners that are entitled to receive the benefit, are simply too embarrassed to claim it, due to the means test.


THE STATE PENSION

The final straw for many pensioners was Labour's 75p increase in the basic state pension - adjusted for that year's low inflation - unveiled in the March 2000 Budget.

The government was forced into an eventual U-turn as pensioners took to the streets in protest.

In November 2000, Chancellor Gordon Brown said he would increase the basic pension by an unprecedented 5 a week and 8 for couples from April 2001 and increase the winter fuel allowance to 200.

In this year's Budget, he made clear that there would also be an above-inflation increase in 2002.

But he refused to budge on the issue which led to the 75p increase in the first place.

Basic state pension
72.50 a week - to go up by a further 3 in 2002
115.90 for a married couple to go up by a further 4.80 in 2002
Despite pressure from within his own party, Mr Brown did not restore the link between pensions and earnings, which had been abolished by the Tories in November 1980, when the pension was worth 22.6% of average earnings, according to government figures.

Today it is worth 17.1% and by 2040 it will be worth around 7%, as it continues to rise in line with prices rather than salaries, according to the Department of Social Security.

Restoring the link with earnings would cost an estimated 0.5bn in the first year, rising to 10bn by 2010, according to government figures.

None of the major parties is prepared to make such a commitment.

But the restoration of the earnings link remains a political holy grail for the Labour left, even though the party's leadership remains committed to the long-term winding down of the basic state pension, based upon an assumption that the country can no longer afford it.

The party promises in its manifesto to raise the basic state pension to 77 a week for a single pensioner, and 123 a week for an elderly couple, by 2003.

The Conservatives focus on rises they would introduce next year, giving pensioner couples over 75 an extra 6.80 a week, and single 75-year-old an extra 4 a week.

The rises would be funded by the scrapping of the New Deal for Lone Parents.

The Liberal Democrats would offer the largest pension rises, offering single pensioners an extra 5, and couples an extra 8 a week, on top of the planned April 2002 increases.

For single pensioners aged 75 and over, the rise would be 10, with over 80s gaining an extra 15. For couples, the top-ups would be 18 and 28 respectively.

The rises, which the party proposes allowing to all senior citizens regardless of their history of contributions, would be funded by a new top rate of 50p on earnings over 100,000.

The Lib Dems have also proposed the setting up of an Independent Pensions Authority to advise on the annual uprating of the state pension.


THE MINIMUM INCOME GUARANTEE


Gordon Brown argues that government cash is better spent on targeting help at the poorest pensioners, rather than offering an across-the-board increase.

He has boosted the minimum income guarantee (MIG), which tops-up the state pension, and ensures a basic level of income.

This will rise with average earnings in April 2001

  • From 78.45 to 92.15 a week for single pensioners, and
  • From 121.95 to 140.55 a week for couples, and
  • To 100 a week for a single person by April 2003.

    It will then begin to go up in line with earnings, a link the Conservatives have promised to maintain next year.

    The government claims 1.78 million pensioners have been lifted out of poverty by MIG, which is paid through the income support system.

    Minimum income guarantee
    92.15 a week for a single person (from April 2001)
    121.95 a week for a couple

    However, critics have objected to the fact that it is heavily means-tested.

    Pensioners have to submit evidence of their savings and those with more than 3,000 have their benefits reduced.

    Many feel awkward about state handouts or find the claims process too complicated.

    As a result, up to 1.1 million are not claiming the income support to which they are entitled, amounting to about 1.7bn a year, according to DSS figures.

    In his March 2000 Budget, Mr Brown tried to address this by doubling the capital limit, allowing pensioners up to 6,000 in savings without affecting their MIG entitlement.


    PENSION CREDIT

    Gordon Brown has also pledged extra help to pensioners with modest savings or a small second pension, through a Pension Credit, to be introduced in 2003.

    The current system penalises those on the minimum income guarantee for every pound of pension they have built up.

    And those just above the minimum income often find they are little better off than those who have saved nothing.

    In an attempt to correct this, Mr Brown will give a cash reward for every pound of second-tier pension, earnings or investment income. He will also abolish the weekly means test.

    Pensioners with incomes below 200 per week, for couples, and 135 per week, for single people, would be eligible for the pension credit.

    But, again, this proposal has been attacked for its reliance on means testing.

    "According to the House of Commons library, Labour's proposed Pension Credit would push 57% of pensioners on to the means test by 2003," the Conservative manifesto for pensioners says.

    The Conservatives have proposed to help poorer pensioners instead by raising the allowances on income tax by 2,000 - effectively allowing the elderly a further 2,000 earnings before the tax kicks in.

    The party claims this will take 1 million pensioners out of tax, while increasing the income of "many others" by 8.50 a week.

    Mr Brown - in his March 2001 Budget - also raised the age-related allowance, claiming that 7 million pensioners would pay no tax or tax at the 10p rate, and promised to keep raising the allowance in line with earnings, not inflation.


    PERSONAL PENSIONS

    Currently, 8 million people in work are not members of occupational or personal pension schemes.

    This means large numbers will have no decent pension in their retirement and will have to go on means-tested state support.

    Research shows many young people either have unrealistic expectations or no knowledge at all of their future pension entitlement.

    And opposition parties claim that expectations look even more unrealistic after the introduction of a "stealth tax" - the abolition of relief on dividend tax credits - on the pensions industry.

    Labour has refused to make taking a second pension compulsory, as proposed by former social security minister, Frank Field.

    Instead, it has tried to encourage voluntary take-up among people who don't have access to employer occupational schemes and for whom personal pensions may be unsuitable because the costs are high and their earnings are low, modest or intermittent.

    Such people tend to include the self-employed, those on low earnings, women and those who move frequently between jobs.

    The government is hoping that its new system of stakeholder pensions will encourage people to save for their retirement. These low-cost, flexible pensions provided by the private sector for people earning between 13,000 and 19,000 a year will become available from April.

    Companies that do not provide an occupational pension will have to offer their employees a stakeholder pension from October at the latest.


    END OF THE STATE PENSION?


    Some have argued that young people face a double pensions bill, providing for today's pensioners as well as their own future.

    The Tories have proposed a radical shake-up of the current pension system, in an attempt to square this circle.

    In their manifesto, the Conservatives have proposed to offer young people the chance to build up a subsidised pension, which would be drawn up following consultation.

    An earlier policy paper suggested an opt-out of National Insurance for the under 30s, who would receive a rebate of 10 a month, which they could then pay into a pension scheme of their choice.

    This would effectively spell the end for the universal state pension in the long run and has led to Labour accusations that the Tories plan to "privatise" pensions.

    There is a concern that an opt-out of National Insurance could eventually lead to a black hole in the public finances, with future governments unable to meet the needs of impoverished pensioners.

    The Liberal Democrats, meanwhile, aim to ensure that "a growing proportion of the workforce" save either through a company pension, or through an Owned Second Pension Account which the party would introduce.


    LONG-TERM CARE

    Scottish pensioners have been promised access to free, universal long-term care, in stark contrast to the rest of the UK.

    In Scotland, Labour's First Minister Henry McLeish was forced into adopting the policy by the Liberal Democrats, which hold the balance of power in Scotland.

    But Labour at Westminster remains opposed to the idea.

    Throughout the 1980s and 90s, an increasing number of elderly and infirm people were forced to pay for their own residential care.

    At the time, Labour leader Tony Blair said he was ashamed to live in country where people had to sell their homes to pay for care in their old age.

    But in power, Labour has side-stepped the issue on the grounds of cost.

    It ignored the key recommendation of a Royal Commission into long-term care, that personal care for the elderly, such as domestic help and nursing care, should be provided by the state free of charge, with only living costs to be means-tested.

    Of the three main parties, only the Liberal Democrats have pledged to have the government provide long-term personal care for the elderly across the UK.

    The Conservatives have pledged to improve the availability of care home beds.

    "The Conservatives will look at the balance of funding between the acute and community sector to ensure it reflects the needs of the healthcare system," the party's manifesto for pensioners says.

    Labour has promised to spend 500m over the next three years supporting, through the benefits system, the country's 300,000 carers, most of whom are elderly themselves.

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