Skip to content

An interesting little elision

A house price boom in recent decades and generous retirement schemes that promise a guaranteed, inflation-linked income to retirees have prompted many financially stable over-50s to quit the workforce for good, said Tony Wilson, director of the Institute for Employment Studies.

OK. Think of our Laffer Curve, income and substitution effects. The claim is that at a certain level of decent pension then the income effect predominates. I’m making enough, so stop. OK, fair enough. Not sure it’s wholly right but willing to accept it for the moment.

Mr Wilson said many older people had stopped working because of the rising value of assets they own and “very generous” rules on accessing private pensions early have given them financial freedom.

So, umm, private pensions and guaranteed inflation-linked incomes? It’s rather more public sector which are defined benefit, isn’t it? Private are defined contribution by now?

OK, there will still be those who lucked out into defined benefit when working decades back but that’s a problem that is already solved in the private sector. No one starting work now does gain access – outside the public sector – to defined benefit pensions.

So, what should we really take from this then? Either the man doesn’t connect the dots of his own thinking or, more unlikely, he’s saying that we’ve got to go after the public sector pensions, isn’t he?

12 thoughts on “An interesting little elision”

  1. Maybe the wording is a bit too loose… “promise a guaranteed, inflation-linked income to retirees” … note that it’s referring to retirees, not savers. So it applies equally to those in receipt of defined contribution pensions ie once you have bought your annuity then it’s true.

    But before you retire, the wording applies to DB schemes only.

    If we acknowledge that ambiguity then the logic fallacy falls away. Still not great English, though.

  2. My private pension goes up and down like Katie Price’s bra size.

    I have given up tracking it, because it is so confusing. ( Pension that is)

  3. I am one of those lucky enough to have worked in the late 60s, 70s, 80s for a generous/far-sighted employer with a DB scheme.
    BUT the inflation-linking on my occupational pension is limited to 3% p.a. (while most of my state pension benefits from full/over-full inflation-proofing). (Also the income from my other savings falls far short of matching inflation even before one takes account of the devaluation of the cash reserve therein).
    So I am aware that 90-odd% of private sector retired people do not have a guaranteed inflation-linked income. Is Mr Wilson unaware of this? Or is he focussed on the word “promise” which only truly applies to public sector schemes.

  4. I’d say he is close to the truth. For me a small amount of DB pension and a healthy DC pension pot allowed me to retire early. The equity in my house means I’m safe. What really helped is the ability to put the DC into drawdown where I can continue to invest in the equities market and not be forced to buy a stinking annuity based on the 15 year Government bond yield.
    I have friends in a similar situation who are likewise deciding to withdraw their labor rather than pay unnecessary tax.

  5. Another consideration would be the rising amount of wibble one has to deal with.

    At a certain point, you’re not having fun any more.

  6. Public-sector defined-benefit schemes often provide a lump sum upon retirement; as well as the option to retire early.

    For example under the Local Government Pension Scheme, if you retire five years early, you sacrifice 22.2% of your retirement income; as well as 11.2% of the lump sum. You can also swap £1 of annual pension income for £12 of lump sum.

    I wouldn’t call those “very generous rules”; but the prospect of retiring at 56 with a lump sum is obviously appealing.

  7. For defined-contribution pensions, the bigger issue is Rishi’s freezing of the Lifetime Allowance until 2026. If your pot had a good few years in the stock market, there’s every chance that you’ll have gone over that £1.073m limit.

    And remember, it’s a limit on withdrawals, not on contributions; so if the market keeps going up, all those gains are taxable at an extra 25% on top of your marginal income tax rate.

  8. My principal defined benefit pension doesn’t pay me the fully RPI-linked pension that was promised in the routine boasting they published over the years.

    (i) Because they replaced RPI by CPI. Can’t grumble, it was a reasonable interpretation of their own rules.

    (ii) They don’t even pay out the full CPI. Assuming it’s not just a blunder it’s presumably a legit interpretation of some near-impenetrable writing in the detailed scheme rules, whereby the reduced payout compensates for my paying reduced NICs during my time in that employment. (Seems arcane, not sure I’ve got it right, anyone know better?)

    If (ii) is indeed legit I can’t grumble about it but I can reasonably grumble about the contrast between what they promised in their promotional literature and what they said in the scheme rules. “Ah!” I hear you say, “but surely your trade union should have drawn your attention to this discrepancy?” Ha, bloody, ha – the trade union was devoted, as far as I could tell, to finding safe Labour seats for its apparatchiks. Pensions scarcely got a mention during my years of membership.

    Lastly you may think “Assuming it’s not just a blunder” is rather harsh. But they took five goes at calculating how much pension to pay my wife, with the amount reducing on each iteration. That’s a real weakness of DB schemes: the member is typically helpless when it comes to checking the scheme’s arithmetic if there’s any idiosyncrasy in her employment record.

  9. “At a certain point, you’re not having fun anymore.”

    My sentiment exactly and primary reason for early retirement.

  10. @ dearieme
    It’s the GMP regulations: the pension scheme provides a “Guaranteed Minimum Pension” in return for reducing NICs on SERPS but it is only liable for providing a flat-rate GMP pension on pre-1988 contributions and for escalation at 3% (or RPI inflation if less) on post-1988 contributions. The inflation (or inflation minus 3%) adjustment is added to your state pension [provided that the DWP manges to get its sums correct].
    The break-down should be sent to you on your annual uplift statement from the Pension Scheme Trustees but most people haven’t got a clue as to what it means.

  11. Thanks, john77. I just hate trying to interpret this sort of thing. The trouble is, I think, that I spent a career asking “why did they do that?” and then responding to myself with “ah, that was clever of them because then logically blah, blah, blah.”

    When, however, I look at DB pension stuff I tend to be overwhelmed by feelings of “That looks like a stupid bloody thing to do and anyway why must they explain it so badly?” In other words, bringing logic to the problem is a really bad idea. What’s needed is a capacity to ignore questions of motive, rationality and so on, and just concentrate on untangling the bad English.

    If I remember rightly: the last time I looked at this I found that the DB scheme and The Pension Service used different jargon to label the identical item. In particular, one lot used GMP and the other used something else. What in God’s name is that about – a deliberate effort to obscure the matter? Fuck ’em all.

    And to continue my ranting: how the devil is the layman to check that he’s getting the correct pension amounts? Must we each hire an actuary? I suspect that the simplicity of DC pensions is an underrated virtue.

  12. @ dearieme
    The DWP doesn’t even *try* to explain it and uses the same term for several different components of the pension they pay us, which makes it even more difficult.
    Unfortunately hiring an Actuary would cost more than it worth.

Leave a Reply

Your email address will not be published. Required fields are marked *