Tag Archives: State Pension

So could the largest Ponzi scheme of all time only happen in America?

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Carlo Ponzi arrived in the US in 1902 with little left in his pocket after gambling his life savings on the boat from Europe and started to work for the US postal service.  He soon found that he could make money buying foreign stamps and then selling them on when the exchange rates moved in his favour and he eventually had a stream of investors willing to pay him to manage their monies in the same way.  After a while he realised that he could increase the number investors by offering greater returns which he funded from new monies invested and by 1920 he was offering 50% interest after 90 days.  As the number of new investors is not unlimited, he realised that there would come a time when he would be caught and no doubt he stashed away enough to live on after the inevitable happened.  He was eventually found out and sentenced to three years for this pyramid selling scam that raised $1 million.

100 years later, Bernard Madoff, who from 1982 until 2001 was successfully running a perfectly legitimate investment fund, was tempted to take the same route and promise unsustainably high investment returns funded from new investors monies.  This scheme attracted some £50 billion of investment and when the scam was finally discovered last year the scheme held assets of just £1 billion.  Madoff was jailed for 150 years and many of his investors, including some of the worlds largest banking organisations, lost a lot of money.

We should, however, be aware that many of the largest Ponzi schemes are run by our governments and central banking organisations.  Our own State Pension scheme is one such pyramid scheme whereby today’s investors (those of us paying national insurance contributions) are funding the previous generations pensions.  With greater longevity in retirement, I wonder how long this pyramid can continue before it collapses in ruins?

This state pension Ponzi shrinks into insignificance when measured against the largest governmental Ponzi of all time; that of the national debt.  Any government needs to fund the things it thinks it must do to remain popular and stay in power – things like chucking money at education, healthcare, avoiding financial meltdown, etc.  As it cannot keep raising taxes to fund these demands, so it has to borrow more.  Government borrowing is considered relatively safe as countries don’t go bust – do they?  How then do they repay this debt with interest?  Well usually by just issuing more borrowing, the classic pyramid scheme.

The UK borrowing requirement this year is now over £220 billion which put Bernie’s little scheme into perspective and brings forward three questions in my mind:

When are they going to be found out?
Well probably not until after the next election.

Will we see any recompense?
No, in fact we shall be paying for this for years.

What will the sentence be?
I suspect it will be a life sentence – restricted to living off a fully inflation-proofed parliamentary pension, supplemented by the odd book deal and speaking engagement.

One last point to remember, no one government is any better than any other when it comes to promises and the value of your vote can and will be eroded over time.

The moral to all this?  That if something seems too good to be true, it always is.

State pension reform

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It must be remembered that there is no “pension fund” which pays the state pensions, the system purely relies on the National Insurance contributions of those in work to pay for the state pensions of those retired.  Changing demographics mean that there are going to be fewer people of working age and more pensioners.  Added to that, increased longevity due to improvements in medical science means that we are all going to live longer as well.  The state pension system is a time bomb that everyone knows is going to explode at some stage but politically no one will do more than tinker with the system as it is easier to put it off for the “next lot” to deal with.

A number of changes are, however, taking place to state pension from next April to help to address these issues and I thought it would be a good idea to cover off some of them to help you understand what is happening.  Some of these changes have been announced for sometime; with others, the information is only now trickling out.

Pension ages
The most widely publicised change is that from next April, the State Pension age (SPa) for women moving from 60 to 65 to fall in line with men’s SPa.  Those women born after 6 April 1950 will see their SPa increase gradually to bring it in line with the SPa for men by 2020.  this change is being made to equalise retirement ages for men and women (you didn’t really think that the government would go the other way and reduce male SPa did you?).

They have also announced that from 2024, the SPa (for both men and women) will increase to 66, from 2034 it will increase to 67 and from 2044 to 68.   For more information on individuals actual SPa, please refer to the calculator on The Pension Service’s website.

Qualifying years
Currently to qualify for the full basic State Pension, one has had to have paid NI contributions at least 44 years (men) or 39 years (women) and for some people not in work, credits have been applied.  In the past some credits have been automatically paid to those claiming Child Benefit or Income Support, if you have Attendance Allowance or Disability Living Allowances, you must formally claim these credits.

From next April the qualifying period for the full SPa is reducing to 30 years.  This means that many more people will qualify for the full State Pension in the future.  If you are unsure the level of your pension you have built to date, you can get a forecast either by registering online, telephoning 0845 300 0168, or completing form BR19 (either Google and download, or we hold copies and can supply these on request).  The pension service was not providing forecasts last year however they are now back to full capacity.

State Second Pension (formerly SERPS)
There are plans in place to change the State second pension to a flat rate scheme rather than it being based on an average of lifetime earnings as currently.  This will simplify the system and could improve benefits for some.  The time frame for this change has yet to be set but we are told that it is likely to be 2012.

Other Changes
The minimum entitlement age for other pensioner benefits such as the Winter Fuel Payments and Pension Credit will increase in line with increasing SPa.  The good news is that they tell us that they have no plans (yet) to increase some of the concessionary benefits that everyone is entitled to at age 60; eye test and prescription charge exemptions and concessionary travel are amongst those retained.

The government has announced its intention to have State Pension increases revert to being set in line with earnings rather than prices by 2015, however, no firm date has been set for this to happen and we shall have to wait to see if this pledge is honoured.

Whilst our advisers have a working knowledge of state benefits, we do not profess this to be a specialist field of expertise for us.  Should you have any questions about the issues raised above, please contact us and we shall either answer them for you or point you in the direction of expert sources of information for more complex questions.  Much more information about the State Pension scheme is available online on the direct.gov.uk pensions website.

Please note that this link is leaving our website and Chilvester takes no responsibility for the content therein

Gentlemen prefer bonds

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This month usually heralds the beginning of spring and whilst the garden is looking good for the time of year, I fear that the green shoots of economic recovery are still some time off.  Hopefully this summer will not be as grey as it was last year.

March also brings a milestone here at Chilvester; it was ten years ago this month that I set up the company with the intention being to establish a firm with a reputation for providing quality ongoing financial planning advice to individuals.  An outcome, I think, we have been able to achieve.  We would like to thank you for your support over this time and we look forward to continuing to work with you for some time to come.

Until last month the phrase ‘quantitative easing’ was not one in common parlance but is simply another way of saying that the government is about to commence printing money.  “How are they doing this?” I hear you ask, the answer is one that the late Ali Bongo would have found impressive.  Simply put, the Treasury are about to run a series of auctions to buy back some of the Government Bonds in circulation. The hope is that buying back some of their borrowing will inject further capital and hopefully liquidity into the system allowing it all to go around faster.  The clever bit is where they are getting the funds from; it is created out of thin air in true magic circle fashion.  In summary then, the government is reducing its debt by buying back its own bonds with money it has manufactured. The banks will get in return some of this monopoly money to then spend. The balance the Treasury has to get right is to pump enough money in to stimulate the economy without creating hyper inflation where the ‘promise to pay the bearer’ becomes worthless.

It was 100 years ago that the state old age pension was introduced.  At that time it was a means tested benefit guaranteeing a minimum weekly pension of 5 shillings (25p for the under 50’s) and payable from age 70.  This equates to £20 in today’s money.  Over the intervening years the retirement age was reduced, the pension revalued and inflation proofing introduced. The scheme is future funded which means that there is no pot to pay the state pension; the national insurance contributions paid by working people this week are used to pay the pensioners next week. In the ‘70s they suddenly realised that with a declining working population and ever greater longevity in retirement, the demands on future funding would become unsustainable and the tinkering has been happening ever since then.   The big problem is that to be seen to dramatically adjust state pensions is a political banana skin that no government wants to be seen treading on.  One of the latest changes being an increase in retirement age from 65 to 68 which is being phased in over a period of years.  Those born after April 1959 will see their retirement age increasing in stages and by the time we get to those born after 1978, the state retirement age will have increased to 68.  By phasing it in over a period of years they are hoping that we will not notice as much.  In my opinion it is only a matter of time before the state pension age is back to 70 and is a purely means tested benefit once again. It might take a little longer before its value is less than 5 shillings, but who knows?