Unpopular changes needed to sort out pensions mess

Much of the media comment since publication of the pensions white paper last Thursday has concentrated on how people aged 27 or less will have to work for an extra three years for just £3 a week extra. Over the next 50 years, the basic state pension will rise to £135 in today's prices, compared with £100 without the reforms. But because average earners will no longer qualify for the pension credit, their income from the state will be cut by £36, leaving them just £3 a week better off.

Most of the media has written this up as if it is a bad thing. But if the government pulls it off, it will be a miracle of financial juggling for which those of us who will be drawing the state pension then should be truly grateful. At the moment there are four taxpayers funding every pensioner on the basic state pension. But by 2050, because of increasing longevity and decreasing birth rates, there will be just two working taxpayers for every pensioner. Quite frankly it's amazing that the state retirement age is only rising to 68.

It has been apparent for years that we need not only to save more but to work longer. But the British public has ignored this message - our money has been spent on a high standard of living while the amount going into savings has plummeted. If we carry on like this, the vast majority will be living on state benefits (under a Labour government) or in penury (under the Conservatives) when we hit retirement. And while government after government has understood this looming predicament, none has been brave enough to sort out the mess.

Tony Blair and Pensions Secretary John Hutton have done a very courageous thing. They have accepted that drastic - and unpopular - changes to the pension system are needed if we are to retire on anything like a decent income.

Projections indicate that about half our pension income could come from our own savings - be it through the new low-cost savings scheme or some other private pension scheme. One of the reasons the private pension figure has added so much is because it includes an employer's 3 per cent contribution. The government estimates that 10 million people could benefit from the new scheme, because their employers do not currently contribute to a company pension scheme on their behalf.

A second important factor is that the example is based on someone investing from the age of 21. Even though he or she is investing the minimum amount possible, the effect of compound growth (where you start earning interest on interest you have already earned as well as your capital) is so powerful that a little builds up into a very sizable sum after many years.

Twenty-one may seem very young to start saving for a pension - most people don't start thinking about putting money into a pension until they are in their late 20s or 30s, and the Association of Certified Chartered Accountants last week pointed out that many young people leaving higher education take years to pay off student loans before they can save. 'The reality of competing priorities must be taken fully on board,' it warned.

But if you leave saving for your pension until you are in your 30s, you will need to save much bigger amounts to end up with the same size of pension fund. By then you might face new expenses - paying a mortgage and having children, for example.

In reality there is never a good time to save. I dare say we would all rather spend our money on other things. But now a government has finally had the guts to make these vital, if unpleasant, changes, it's up to us to do the rest.