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Jill Kirby

Jill Kirby: We can’t rely on government, so we have to start saving for old age

With inflation still outstripping wage rises, this is not the easiest time for a government to get more workers saving for their old age. But the impetus behind the coalition's new auto-enrolment pension  system is right, and pensions minister Steve Webb is justified in his warning that, unless savings habits change, many people face a nasty surprise in later years when their income falls well below their expectations.

The new system is by no means perfect, and when it is rolled out to include all small businesses it will create some unwelcome extra paperwork. But I'm still inclined to support it. With fewer than half of all workers currently saving for retirement, it seems to me that auto-enrolment is the only way to create the culture change necessary to get us all to finance our old age.

There are plenty of question marks still hanging over the scheme. For example, if low-income workers save just enough pension income to deprive them of means-tested pension credits, they will justifiably feel resentful. The coalition's plan to replace pension tax credits, with a flat rate universal pension of around £140 a week, should ensure that this doesn't happen. But it's not yet a firm pledge. In any case, some form of means-testing is bound to persist; the reality is that those who set money aside for their own future risk making themselves less eligible for state support.

Critics argue that the new scheme needs to be more flexible; Ros Altmann at Saga thinks that ISAs and other forms of saving should be included.  She is of course right to point out that pension schemes are not the only way to save. But research suggests that too many people take the Micawber view: that something will “turn up” and that they won't need a pension after all. The government is trying to break this complacency. One of the things people expect to “turn up” is a handy inheritance. According to a survey this summer by Barings, 17% of adults expect that inherited property will help fund their retirement. But as longevity increases, such expectations are unrealistic.

This also highlights the scale of the problem any government faces in telling voters the truth about funding residential care for the elderly. Yesterday the Telegraph claimed that George Osborne blocked a plan by Andrew Lansley to means-test the care allowance provided to the elderly who stay in their own homes. Allegedly, the then Health Secretary intended the money saved would be used to pay for a Dilnot-style cap on nursing home bills. In the Chancellor's words, this would be “robbing Peter to pay Paul.” No wonder the coalition is still unable to come up with a firm commitment to the cap: the £2billion or so needed to pay for it will only come out of the pockets of those who are intended to benefit from it. The government might have been wiser to spell out the flaws in the Dilnot proposal at the outset, rather than suggest that it was only a matter of time before it would be implemented.

The truth, surely, is that the government can no longer expect to raise enough money from taxation to look after us all in old age. Elderly homeowners should not be outraged at the prospect of using their own assets to pay for their own care. The media is fond of claiming that pensioners are being “forced” to sell their houses to pay care home fees, and politicians seem reluctant to rebut such claims. But it's important to point out that where a spouse still lives in the marital home, its value will not be taken into account for means-testing, least of all will a sale be forced. If there is no surviving spouse or partner, and the house stands empty, its value will be included in a means-test – but why not? This does not necessarily mean it must be sold to pay care bills; an alternative option, much favoured in the current housing market, is to rent it out.

The danger for the coalition in half-promising to introduce the Dilnot cap is that it encourages false expectations. Surely it would be better to come clean and acknowledge that it will never happen? George Osborne is to be commended for his honesty: enacting the cap would indeed be robbing Peter to pay Paul. Rather than relying on a future government to protect our elderly parents' homes for our own pension pots, we have to start saving for our future. Auto-enrolment is a step in the right direction.

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