Sunday, 6 March 2011

Proposed Pension Reform will encourage Government to inflate the economy

The Pension reform being proposed by Lord Hutton may have dangerous consequences. It is clear that the public sector will have to see a cut in their final salary schemes, but a more transparent solution must be preferable to one which may have dangerous consequences.

What is being proposed is that workers receive a pension in line with their average life-time earnings. What is not being disclosed is that wage inflation will seriously erode that average. If compounded interest is a marvel for savers, it is a nightmare for pension beneficiaries.

Suppose wage inflation is 5% compounded over 40 years. A person starting on £30.000 p.a will receive £201,000 after 40 years with an average salary of £90,600.
If wage inflation is 8% compounded, that same person will receive £603,000 with an average salary of £194,300

In the 1st scenario, the pension will be 45% of leaving salary and in the second just 32%

Once again government is changing to policy that undermines the population through inflation.

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