Tories' vision: pounds 175 a week and big savings

THE PENSIONS REVOLUTION

The state could save pounds 40bn per year by 2040 under the Conservatives' new pension scheme, according to Peter Lilley, the Secretary of State for Social Security.

However, anyone over 20 today is unlikely to be affected by the new arrangements. Legislation would be passed towards the end of the next Parliament and phased in over the following 40 years.

Under the Basic Pension Plus programme, everyone would have to choose a personal pension plan from an approved company. They would then receive a National Insurance rebate of pounds 9 per week, which would be paid into the fund in order to provide a basic state pension, regardless of how much they earned.

The basic pension would remain at current levels and be topped up to take account of inflation. If a person's fund was not sufficient to pay the basic pension, the Government would guarantee to top it up.

In addition, employees would receive an additional National Insurance rebate of 5 per cent of their earnings to fund a separate, income-related pension.

The Government believes an employee on average wages could build up a fund worth pounds 130,000 over a working lifetime, and that this would be enough for a pension of pounds 175 per week, tax free.

If extra investment boosted economic growth by one-twentieth of 1 per cent per annum, the scheme would be self- financing, ministers said yesterday.

The scheme is designed to move Britain from the pay-as-you-go scheme, under which today's workers' contributions pay the pensions of those who have already retired, to one in which everyone builds up their own personal retirement fund. Over a generation, the amount held in private schemes would increase.

However, Labour claims the Government will not save any money until its first Basic Pension Plus generation retires in around 2040. Labour said last night that the scheme would cost pounds 2.4bn in its first five years, with workers having to pay twice - once to fund their own schemes and once to fund those who had already retired.

The Government plans a Green Paper on which pensions companies and other interested parties would be consulted.