Pension Credit Could Destroy Pensions - Pensions Week

by Dr. Ros Altmann

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This week, the government has introduced its long awaited policy for tackling pensioner poverty. The Pension Credit is yet another means tested benefit, supposedly designed to ensure that people who save will not be penalised by losing entitlement to benefits. We are told that individuals will now be rewarded for their saving, so that ‘it always pays to save’. This is not true – the policy is being mis-sold!

There are several problems with this new policy initiative, apart from its complexity and high administration costs.

For anyone who does not have a full Basic State Pension (and most women, for example, don’t) any private pension they receive will still be lost pound for pound. For example, a typical woman with £15 per week less than the full BSP will lose the first £15 a week of her private pension completely. This is the equivalent of £20,000 worth of pension savings, which will have been totally wasted! Any adviser who advises them to contribute to a pension would be potentially liable for mis-selling.

Even with full BSP, people still lose 40% of their pension. Since around 75% of future pensioners are forecast to be entitled to Pension Credit, pensions may now be unsuitable for most people. Unless individuals can be sure that they will be in the top 25%, they may be best advised not to save in a pension. In particular, without an employer contribution, most individuals would probably be better off with an ISA, which can be cashed in at any time, rather than locked into a pension which must be used to buy an annuity on maturity.

Pension Credit will only help those who actually claim it. Government assumptions of 70% take up, mean that 1 million people will not receive their entitlements. As the population over State pension age will increase by nearly 50% by 2050, even if take-up of benefit rises to 80% the number of people in poverty could actually rise.

There are several ways in which the policy could be changed, to alleviate some of these problems.

1. Government could announce Pension Credit would only be temporary, and would be phased out within, say, 10 years. Anyone contributing to pensions, who is under 50 now, would then not lose out in the means test when they retire.
2. The means test calculation could disregard the first £15 of weekly pension income, allowing people to benefit fully from these pension savings.
3. Government could allow people to ‘undo’ their pension, if they end up worse off when they retire. Providers would keep a separate record of tax relief within the pension and deduct this amount from the pension pot, paying the balance to the individual, as if the pension had been an ISA instead.

Any of these proposals could alleviate the damage which Pension Credit is doing to future pensions. The policy is well-meaning but extremely dangerous and must be changed.

An even better solution would be to end means testing for such a large proportion of the population. Perhaps pay the Minimum Income Guarantee amount to all those over age 75, without the need to claim. It is the oldest who are most in need of the benefit, yet find it hardest to claim. The damage to pensions would be lessened and this Government could claim to have ended poverty for the ‘elderly’.

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