There is good and bad news in the coalition's announcement – and it reminds us to start thinking about our plans
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Most of us avoid thinking about pensions until retirement looms. Photograph: Dominic Lipinski/PA
A friend I bumped into in the street yesterday complained that she has persistently misjudged the timing of her life. By being born later than expected in the early 50s – in April instead of March – she had deprived her parents of the full year's tax rebate then available, to her mother's recurring annoyance. Now my friend finds herself having to wait 3½ years longer than her older sister to get her pension because the pension age for women is no longer 60.
I avoided using the P-word until the end of the previous paragraph because any mention of "pension" is an efficient way of stopping passing readers in their tracks. As the Guardian's editorial on Monday's coalition pensions reform notes this morning, most of us regard the issue as important but boring – until retirement looms. By then it's often too late to fix omissions.
I plead guilty to that failing too, though I have been reading the small print lately and finally started to draw a pension – state and occupational – when I moved to part-time working in November. What follows is an Old Fartonian's advice to younger people on the need to concentrate sooner than I did. It's a bit like the reply I give to those who ask: "Why are you taking the stairs, not using the lift?" I say: "I wish I'd started using the stairs when I was your age."
There are two things going on in Monday's white paper. One is about fairness to those Britons who have done badly in recent years – women and carers, low earners, the self-employed – and the other is about affordability. Long after I have ceased to be a burden on the state and my family these reforms will be saving the Treasury – and taxpayer – an estimated £9bn a year, mostly at the expense of higher earners and the young.
Good or bad? A bit of both. The Tory-led government is seeking to shrink the state for both ideological and economic reasons. It believes public sector provision is both costly, less fair and ineffective (not necessarily true) but it also believes (more accurately) that the west's welfare states will prove too generous in the new Asia-centred world order and need rethinking.
We can argue about both propositions. What is indisputable is that average life expectancy is growing dramatically everywhere – 80.1 in Britain, higher elsewhere. That is mostly good news for healthy individuals, though sometimes also a problem for them, their families, the NHS and wider society. Someone has to pay for it and that someone is us.
Hence the pressure to raise the retirement age, to 66 (2020), 67 (2028) and to 68 by 2046, at least in theory, though we can't be sure the problem will look the same way by 2046. Problems have a habit of changing. If we are going to live longer we will have to work longer and contribute more to our retirement support. We can't expect what is likely to be a shrinking working population to bear the burden of ever more oldies getting their 100th birthday telegram from the Queen, King Charles III or William V (unless she outlives both of them, as Louis XIV did his immediate heirs).
Fine, fine. But the Lib Dem pensions minister Steve Webb, IDS's brainy deputy at the DWP, a savvier version of Frank Field, is going further. As you may have read – but probably not, eh? – the new flat-rate basic pension of £144, payable from April 2017 (inflation will make it higher by then) will be higher than the current basic pension (£107.45) and sweep away assorted increments and means-tested top-ups. That's good; simplicity is usually wiser. The poor, self-employed and women with incomplete careers will benefit.
But rebates on national insurance currently permitted to employers and staff in their own "contracted out" occupational schemes will be withdrawn – here's where the big Treasury saving comes into view – leaving them to raise contributions or cut benefits to fill the hole after a transitional period. It's the equivalent of a tax rise of 1.4%, £250 a year on a £25,000 salary. There are lots more details you can check – I wish you would, but suspect you won't – on the DWP website, the highly authoritative Institute for Fiscal Studies (IFS) site or even Webb's Commons statement here. Rare among ministers, he is a professor of social policy who knows his stuff in detail. His Labour shadow, Gregg McClymont, is no slouch either – an Oxford don in his past life. He asked some sharp questions – and got answers too.
These changes will affect public sector workers, better off than many realise because they are on final salary (defined benefit) schemes, as well as those in the private sector who have seen more such schemes replaced by what are euphemistically called "defined contribution" schemes (the Guardian included) in recent decades.
It is a move which transfers the risk from employer to employee by way of cash-purchase annuity rates and other uncertainties. You get a lot less pension for £100,000 worth of savings than you did 20 years ago – less than £5,000 a year compared with £11,000 a year, if memory serves. Annuity rates are only now starting to show signs of stabilising as the boom in UK government bond prices eases off. The higher the price, the lower the interest rate a bond pays. It's one of the things you learn when retirement looms.
Bond rates apart, higher earners – on £40k or more – who were able to accumulate more than the basic £107 a week because of contributions made to now-defunct second state pension schemes (who now remembers Serps, Barbara Castle's great reform?) will also lose because past commitments will be bundled into the £144 basic pension from 2017. That's up to £100 or more a week lost. Divorcees, non-working women and other groups will also be caught. Read the small print.
But in the long term there's no hiding the fact that younger workers will have to work more years, pay higher contributions and get less from the state than they now do. They will probably live longer, mind you, and enjoy healthier lives too, a modern medical miracle, so it is not all gloom. "We'll all live happily until we're 80, then one day wake up dead," as I once heard a medical visionary put it.
It is, however, complicated and governments have a duty to make it all sort-of-affordable. It's more about demographics than it is about the recession or the rise of Asian economies. Hence the latest drive, launched last year, to get people on low incomes into savings schemes to augment the state pension – £144 a week is around £7,500 a year – and maintain an adequate living standard.
It's a tough doctrine when you are not earning much, though pension contributions can be offset against tax. Despite the cut to a £40,000-a-year ceiling on deductible contributions (it was £250,000 until recently) even that is a more attractive bargain for high earners since £1 paid in costs a 50p rate taxpayer only 50p net, whereas it costs a basic 20p rate payer 80p.
What strikes me as wildly improbable is that most people, especially doing manual, stressful or unrewarding jobs, can be expected to work into their 70s – the pension age will rise to 77, according to one expert quoted by the gloomy Daily Mail. In distinguishing between manual and desk work in adjusting retirement ages, the French president, François Hollande, made a humane decision last year.
The important thing is to check it out and do it now. All the newspapers carry financial sections which advise on pensions as well as credit card problems, heating bills and car insurance rackets. I know it's boring, but it doesn't take long to start to get the hang of it and better understand what's going on, options included. Go on, do it, it's later than you think.