Thursday, January 10, 2008

A prosperous ripe old age awaits us...

...well at least some us.

This one is tad political so I thought I'd post it here rather than chez moi. It's a bit shoot from the hip but then again, when don't I?

I had the misfortune to catch Woman's Hour on Radio 4 this morning. Normally I would not say misfortune as there is usually a cacophony of common sense pouring forth from the wireless, but today common sense was replaced by the sickeningly obvious observations of an overeducated (one can assume overdressed also just as a corollary) individual. The mindblowingly banal facts were:

  • As a nation, we are living longer
  • People do not save enough for retirement
  • Nursing homes should provide a comfortable environment in which to grow old and wither
  • Old people add value to society
So far, you cannot disagree. However if you go into the economics of this wonderful Utopian twilight, it kind of breaks down. The guest asked a rhetorical question: "We need to dig into our pockets to pay for this so do we need to increase taxes in order to provide an adequate level of care for the elderly?"

"Sign me up" shouted an infuriated Kenny, "after all, I'm already taxed so much that I can barely afford to make my own pension contributions let alone save for my retirement."

If you assume you're a top rate income tax payer, you've never even seen 40% of your money when your payslip reaches you. It has disappeared in tax and national insurance. Now you can subtract another 5% or so as a pension contribution. We're advised to be saving up to 20% of our earnings towards retirement (for the purposes of this, I'm going to say 15%). So, wow, the nouveau riche yuppy generation see probably 40% of their take-home pay.

Let's take numbers that are easy to calculate and then we can scale it upwards later. We will also assume that we're paying top rate income tax. So we'll assume a salary of £40k.

Salary per month (gross): £3333
Tax: £1333
NI (assumi9ng it still is 7.5%): £250
Pension contribution: £165
Savings towards retirement: £500


Net pay: £1085

Now comes the crux of it all. Our hypothetical "save for my old age" yuppie/dinky who is earning enough to pay top rate income tax has a whopping £1085 per month with which to house, clothe and feed themselves. Not to mention pay insurances, travel expenses etc.

Seeing we are analyzing Dr Sensible's finances here, he can have a mortgage up to 3.5 times his salary so £140k. Hmm, you'll be lucky to find a two-up, two-down for that in most places you might consider living. I've no idea what the repayments on this would be, but I'm guessing a minimum of £600 a month. So we're now down to £485 available cash per month.

Dr Sensible doesn't like wasting money on cars so he has bought a car that costs him £100 per month in loan repayments. Ouch! £385 and falling.

Now we have utility bills and poll-tax.

Well done. Even Dr Sensible has blown his salary before he gets into his never-never car on payday to drive home to his sparsely populated fridge.

Now scale these numbers down to what the average worker earns (let's assume it's £15k). Okay, you wouldn't be paying top-rate tax, but do the maths and it's even more horrendous for the average worker while they are working. Hey, but don't we have a sweet retirement to look foward to, should we be fortunate enough to see it? After all Dr Sensible must have tens of thousands of pounds in savings, pension funds and equity in house. He surely must be in for a nice nursing home, the odd trip to the seaside etc.

Wrong Dr Sensible -- you need to be means-tested. Look at all that equity ties up in your house and all your savings. You don't need government assistance at all -- you should pay this out of your own pocket. When it runs out, we'll tap into state resources but you'll have to move to a state nursing home in Slough. We've calculated that it will be in about 12 months, 24 if we can sell your house.

Can you see the absurdity of this? We hike up taxes for whose benefit? Dr Sensible doesn't get any real benefit or reward for being a paragon of prudence. Working people don't benefit. More private money is whisked into public coffers ripped from paying pensioners and over-taxed workers.

In a fair society, those that could afford to pay privately should have the choice of doing so or not in exactly the same way that people have a choice as to whether they use the NHS or BUPA.

So Mrs Daddy's-So-Incredibly-Rich-I-Can-Afford-Ideals, I would ask that you kindly vacate the seat, get out of broadcasting house and return to Eton or Oxford for a refresher in GCSE Basic Logic and its Application in the Real World. Come back when you can cut taxes and provide the levels of public service we as tax-payers can expect. If you can't balance it, your fundamental economic policy is flawed. Sadly I've covered only one part of a multi-trillion pound budget. I shudder to think about what other warty gremlins lie beneath.


Stan said...

As a defrocked accountant, I have to take issue with your figures - here's what I get :-

Gross Pay 3,333.33
Tax free Allowances (assume Dr Sensible is married) 435.42
So, Total taxable 2,897.92
Tax paid 617.87
National Insurance 276.00
So, Total Deductions 893.87
and Net Wage is £2,439.47

Pension contributions are effectively tax free - so well worth making (unless you need to stock the fridge or fill the Mondeo with £1 a litre petrol.) I don't exactly understand why you would want to save for retirement outside of a pension i.e with no tax rebate.

Rule of thumb - to get a pension of two-thirds of your salary, your contributions will be half your age as a percentage of your gross salary.

So, Dr. Smug would have to pay 20% x £3333 = £666 - the pension contribution of the Beast. Of course such a sensible chap would probably have started sooner and would need to pay less.

So it's not quite as black as you paint it, but there is definitely a problem here.

Kenny said...

All thye advice that I have been given is don't rely on your pension as being your sole income.

My point still stands regardless of exact numbers. :)

It's all moot with me anyway!