Conal Gregory: Pension crisis is the problem our politicians can't afford to ignore

Their numbers are being boosted by a lively and vociferous new group – baby boomers born in the decade after the Second World War, who are now either in retirement or close to it.

Many will be following the debate about extending the retirement age. Before the election, Labour proposed raising it to 68 by 2046 and the National Association of Pension Funds (NAPF) has suggested making it 70 by that date.

NAPF called for a new initial state pension of 8,000, which is 25 a week above the current rate. This "foundation pension" would replace the basic and second state pensions. It would be funded by increasing

national insurance, upping the retirement age and restricting fringe benefits (such as winter fuel payments and complimentary bus passes).

Such a new rate would represent two-thirds of average earnings and could lift two million pensioners out of means-tested benefits.

Pensioners will suffer from the freeze announced on personal allowances. While Labour has held the level at 6,475 for those aged up to 65 and 9,490 for people aged between 65 and 74 – the amount that can be earned before paying income tax – the effect of inflation (currently 3.7 per cent) means this is a tax rise. As a result, the Exchequer will gain an additional 2.2bn this year and 2.8bn the year after.

The very modest increase in pensions of 2.26 per cent exemplifies a mean attitude towards older people.

Even this small rise cannot be enjoyed by more than 500,000 British pensioners around the world. Those who retire abroad find their pension

frozen with no increases in line with the cost of living. Yet these elderly and often vulnerable people paid their national insurance contributions like everyone else but are now being robbed.

Some fought for Britain but – without a vote today – the last government chose to ignore their plight. The International Consortium of British Pensioners says some veterans are now being forced to live on as little as 6 a week. The new Government should right this injustice.

Many in work are not setting aside money to fund their retirement. To counter this, a compulsory workplace pension has been proposed. Formerly called Personal Accounts, now renamed Nest (National Employment Savings Trust), it is due to take effect in stages from 2012.

It will mean a statutory minimum eight per cent is contributed: four per cent from employees, three per cent from employers and one per cent

from the state. NAPF argues that the total rate should be 11 per cent.

Such a stick suggests the carrot has failed. Currently there is a mighty carrot with tax relief of up to 40 per cent on contributions. Invest 8,000 and the Treasury adds basic tax relief of 2,000. If you pay higher rate tax, depending on your income, a further 2,000 may

be claimed.

Few realise that non-earners – including those who retired early and non-working spouses – can pay 2,880 annually and have 720 added to a pension investment of 3,600. This makes an appealing idea for a new baby.

Some are rightly put off investing this way for two reasons: the virtual requirement to take an annuity with 75 per cent of

the proceeds and the appalling performance of pension providers. Instead they should at least be using their full ISA which is 10,200 from April 6 (or already that for those aged 50 years).

Investing in property and tax efficient vehicles like Enterprise Investment Schemes and Venture Capital Trusts offer flexibility that pensions deny.

Contributing 100 gross monthly into a with-profits pension fund over 20 years, which amounts to 24,000, would on average yield

43,142 but could be as low as 35,973, according to Moneyfacts. A year ago the average value was 46,502.

The unit-linked approach to pensions is more volatile. On the same basis, expect 39,799 on average (29,921 last year) but possibly as low as 28,459.

According to KPMG, a pension scheme which followed a typical investment strategy from 2000-2009, would have seen its money grow at only 2.25 per cent annually before costs. Contrast such mismanagement with the average bank deposit which returned over twice as much at 4.7 per cent.

More of the time expended by firms like Aviva (formerly Norwich Union) could have been spent on gaining benefit for future pensioners rather than expensively rebranding. Yet no policyholder can challenge such abuse of funds.

Those investing for retirement may worry that tax carrots will change. Pension investments do not incur either capital gains tax or further income tax and can provide a taxable income from 55 years.

Conservatives talked more openly about reinvigorating the savings ethic. Expect the removal of compulsory annuitisation – which compels you to buy an annuity with your pension pot, giving you an income for the remainder of your life – and earlier access to pensions.

Conal Gregory is the Yorkshire Post's personal finance correspondent