Select Committee on Work and Pensions Minutes of Evidence

Memorandum submitted by the National Pensioners Convention (PC 08)


1.   The Pension Credit: an old idea revived

  The main change proposed is a system of disregards—the 'savings credit'. Disregards were important in the past but their value was not maintained.

  We welcome the decision to retain the capital disregard but propose that the assumed rate of interest on capital above that level should be reduced to 5.2%.

2.   Needless confusion

  Presenting the `savings credit' as a separate benefit makes the proposals needlessly complicated. We propose a major simplification of the Bill.

3.   The role of the credit in the Government's pensions strategy

  The Pension Credit represents a further massive increase in means-testing.

4.   Uprating the Pension Credit

  To limit the cost, the Government may reduce the 60% `reward' or raise the savings credit threshold above the Basic Pension. Instead, both the Basic Pension and the savings credit threshold should be raised in line with earnings.

5.   Incentives to save

  Once in operation, the credit may be perceived as a 40% tax. Financial advisers and pension providers will have a duty to inform people of its effects. On balance, the effect on incentives to save is likely to be negative.

6.   Making the right decisions about pension provision

  Retirement incomes are already subject to uncertainties about the uprating of the Basic Pension, the conversion of the State Second Pension into a flat-rate scheme and the value of money-purchase pensions. To these uncertainties must now be added the uprating of the Pension Credit. Planning for retirement will be even more hazardous and many will decide to spend their money while young.

7.   The impact of the Pension Credit on pensioner poverty

  For the 1.2 million pensioners gaining from improvements to the minimum guarantee, the Credit will undoubtedly reduce poverty, though a straight increase in the MIG would do so more effectively. Of those above the MIG, many are poor, but they would benefit fully from an increase in the Basic Pension.

  Most beneficiaries will be women but, as their occupational pensions are smaller than men's, they will benefit less. Women aged 60-64 should not be excluded.

  There should be a separate earnings disregard, sufficient to allow at least half a day's work per week without loss of benefit.

8.   Likely levels of take-up

  Despite the measures proposed to improve take-up, with more than twice as many pensioners qualifying, the number of non-claimants is likely to increase.

9.   Conclusion

  The Pension Credit is an attempt to counteract the disincentive effect of meanstesting on saving for retirement. While there is a case for increasing disregards, we would prefer measures to raise pensioners' incomes above the level at which means-tested supplements are necessary.


1.  The Pension Credit: an old idea revived

  1.1  From 2003, Income Support for people aged 60 or over, now known as the Minimum Income Guarantee (MIG) will be given yet another new title: `Pension Credit'. For those aged 65 and over, the change of name will be accompanied by an important change in the method of calculation: a proportion of certain types of income above a given level will be ignored in assessing benefit entitlement. The White Paper (The Pension Credit: the Government's proposals) describes this as `a fundamental reform to the welfare system—for the first time, saving will be rewarded instead of being penalised.' In a similar vein, Jeff Rooker, the then Pensions Minister, claimed in reply to a Parliamentary Question on 5 March 2001: `It does not pay to save in this country, and it never has since 1948. The Pension Credit will reverse that.'

  1.2  These claims are misleading. `Disregards'—limited amounts of income or capital which people are allowed to have without any reduction in the means-tested payments made to them—have a long history and were an important feature of the 1948 National Assistance Regulations. Few of the National Assistance Board's pensioner clients had substantial amounts of earnings, occupational pension or capital but, for those who did, the 1948 disregards were by today's standards surprisingly generous. The minimum income received by a single pensioner householder from the NAB in 1948 was 24s. a week; but up to 20s. of earnings and up to 10s.6d. of superannuation payments (ie occupational pensions) were disregarded. A pensioner receiving both part-time earnings and an occupational pension could, therefore, have up to 30s.6d. of weekly income from these sources in addition to the 24s. minimum.

1.3  Over the past half century, maintaining this system of protection of income from occupational pensions and other sources has not been seen as a priority. When benefits were uprated, the disregards generally remained, at best, unchanged. The occupational pension disregard, after various modifications, was actually abolished in 1980, since when the receipt of an occupational pension has resulted in a pound for pound reduction in Income Support. The amount that pensioners can earn without loss of Income Support is now ludicrously small: in the vast majority of cases only £5 a week (or £10 of the combined earnings of a couple). It is true that the capital disregard, raised to £6,000 in April 2001, now compares favourably with the £50 disregarded under the 1948 regulations (raising the £50 limit in line with the minimum income level would have resulted in a capital disregard of £4,167 in 2003), and we welcome the Government's decision to retain the disregard; but we note that, although the rate of interest used to calculate the assumed income from savings above the £6,000 limit is to be reduced in 2003 from 20.8% p.a. to 10.4%, it will still be twice as high as in 1948. In our response to the November 2000 consultation paper on the Pension Credit, we suggested that the assumed rate of interest should be 5.2% (£1 a week for each additional £1,000 of capital), which would be much nearer to the real interest rate.

2.  Needless confusion

  2.1  The Pension Credit is, therefore, not a radical innovation but a revival of a long-standing and relatively simple feature of minimum income legislation: that certain amounts of income and capital are disregarded, wholly or partially, in the means test. Unfortunately, the Government has chosen to present the proposed system of disregards not as an integral part of the calculation of entitlement to Income Support, but as a separate benefit: the `savings credit' payable as a `reward for savings'. Whatever the presentational advantages of this approach may be, it has the major drawback of making the proposals needlessly complicated and confusing. Anyone who has made the attempt will know how difficult it is to explain why (as shown in the tables in Annex A of the White Paper) the savings credit for a single pensioner increases by 60p for each £1 of income between £77 and £100 and reduces by 40p for every £1 of income over £100.

  2.2  If Annex A is mystifying, clause 3 of the State Pension Credit Bill, which sets out in 8 bewildering subsections the way in which the savings credit is to be calculated, is almost incomprehensible. Our attempt to understand it has led us to conclude that, as drafted, it not only rewards pensions and other income from savings (`qualifying income' as defined by regulations under clause 3(6)) but also income above (but not below) the MIG level derived from other sources, which does not seem to be the Government's intention. Assuming that the intention is to reward only `qualifying income', this result could be achieved by deleting the whole of clause 3 and adding the following 2 subsections to clause 2 which deals with the calculation of the `guarantee credit':

        (8A)  For the purposes of this section, if the claimant has attained the age of 65 or is a member of a married or unmarried couple the other member of which has attained that age, there shall be disregarded in the calculation or estimation of the claimant's income a prescribed percentage of the amount, if any, by which his qualifying income exceeds a prescribed amount (the savings disregard threshold).

        (8B) Regulations may make provision as to income which is, and income which is not, to be treated as qualifying income for the purposes of subsection (8A).

        Since there would no longer be a separate savings credit, the term `guarantee credit' could also be dropped. There would simply be one benefit, the Pension Credit, which would replace the MIG.

  2.3  In suggesting this major simplification of the Bill, we do not wish to imply that no other changes are needed. We believe, however, that serious discussion of the merits and defects of the Government's proposals would be greatly aided if they were presented in a more straightforward way. We hope that clause 3 will have been removed before the Bill reaches the House of Commons.

<jf35>In the following sections of this submission, we address most of the issues listed in the Committee's press notice of 7 December 2001.

3.  The role of the new Credit in the Government's overall pensions strategy

  3.1  The November 2001 White Paper, The Pension Credit: the Government's proposals, presents the Pension Credit as the third stage of the Government's pension reforms, the first two stages being (1) the Minimum Income Guarantee (MIG) and other measures to provide more money mainly for the poorest pensioners and (2) `long term reforms that will help prevent poverty from arising in the future', including the State Second Pension and stakeholder pensions.

  3.2  By relying on the MIG, rather than pensions, as the main source of additional resources for today's pensioners, the Government has accepted the inevitable consequence that means-testing will play an increasing role, at least in the short term. Even in the longer term, with the Basic State Pension normally rising in line with prices while the MIG rises in line with earnings, there are likely to be very large numbers of pensioners whose incomes (including the State Second Pension and stakeholder pensions) are around or below MIG level.

  3.3  The attraction of means-testing, for the Government, is that, even when the high costs of administration are taken into account, it is much cheaper than across-the-board increases in benefits. But means tests, especially when applied to pensioners, have a number of drawbacks:

        (1)  They discourage people from making their own provision for retirement - the more you save, the less you get from the state.

        (2)  People who do save for their retirement resent the fact that they are little better off than those who do not.

        (3)  No Government has found an effective long-term solution to the problem of low take-up of means-tested benefits - not even the present Government, which has carried out a massive take-up campaign for the MIG with disappointing results.

  For these reasons, the National Pensioners Convention has consistently called for improvements in state pensions, including the restoration of the earnings link, in order to reduce dependence on means-testing. The Pension Credit will provide welcome increases in the incomes of those benefiting from it, but it also represents a massive increase in the scope of means testing and, for the reasons explained, we are not convinced that it will achieve its fundamental aim, to mitigate the disincentive effects of the means test.

4.  Uprating the Pension Credit

  4.1  The Government's intentions regarding the future shape and size of the Pension Credit are far from clear. The White Paper confirms that the minimum income level (now known as the MIG but renamed `standard minimum guarantee' in clause 2 of the Bill) will rise in line with earnings during this Parliament. There is nothing in either the White Paper or the Bill to suggest that this policy will be pursued beyond the end of this Parliament, but it seems reasonable to assume that that is the present Government's intention.

  4.2  How the savings credit will be adjusted in future years is much less clear. The White Paper says (on page 5): `The savings credit will give pensioners 60 pence for every £1 of income they have from second pensions, savings and so on above the level of the Basic State Pension up to a maximum.' The implication, one might reasonably assume, is that the Basic Pension level will remain the starting point for the credit, so that if, for example, the pension were to rise from £77 a week in 2003 to £80 in 2004, the savings credit would then be a percentage of a pensioner's income over £80.

  The Bill, however, leaves the `savings credit threshold' to be prescribed, and subsequently amended, by regulations. It could be either higher or lower than the Basic Pension.

  4.3  Similarly, while it is clear that the credit will initially be 60% of income from pensions and savings above the threshold, the Bill simply refers to `a prescribed percentage' and we cannot assume that the prescribed percentage will always be 60%. Indeed, the November 2000 consultation paper referred (on page 19) to `an initial rate of a 60p reward for every pound of savings income', implying that the rate might change later.

  4.4  These uncertainties are not simply a matter of the Government leaving itself room for manoeuvre. The fact is that, if the minimum guarantee rises in line with earnings while the savings credit threshold remains tied to the Basic Pension and rises in line with prices, the band of income on which the credit is based will steadily widen; the value (and the cost) of the credit will increase; and the level of income at which the credit expires (initially £134.50 for a single person) will rise faster than either prices or earnings, greatly increasing the number of beneficiaries. The National Pensioners Convention's response to the consultation paper gave an example of what might happen within a few years:

        When the scheme starts in 2003, the maximum savings credit for a single pensioner will be £13.80 per week—60% of income between the Basic Pension of £77 and the MIG rate of £100—and the level of income at which entitlement to the savings credit ceases will be £134.50. Now suppose that between 2003 and 2010 the Basic Pension rises by 20% in line with prices, to £92.40 a week, while the MIG rises by 40% in line with earnings, to £140 a week. The maximum savings credit, payable where original income is equal to the MIG, will have risen from £13.80 in 2003-04 to £28.56 in 2010—11—an increase of 107%. The level of income up to which a single pensioner qualifies for the savings credit will have risen from £134.50 in 2003—04 to £211.40—an increase of 57%. And this, in turn, means that still more pensioners will qualify for the savings credit and will thus be subject to a 40% tax on a steadily growing proportion of their total income. (The Pension Credit, NPC, 2001, pp. 20-21)

  4.5  It is most unlikely that the Government intends the savings credit to expand in this way. Ways in which it could be prevented include a gradual reduction in the 60p `reward' or disconnecting the threshold from the Basic Pension so that only part of the income above the level of the Basic Pension would qualify for the credit. By far the simplest and most satisfactory solution would be to raise both the Basic Pension and the savings credit threshold in line with average earnings, so that the basic shape and dimensions of the scheme would be preserved automatically without the need for any other adjustment, but the Government clearly does not intend to adopt that solution. Indeed, so far, the Government has not even acknowledged that there is a problem. We hope that the Select Committee will explore this crucial aspect of the proposals in depth.

5.  Incentives to save

  5.1  We have already noted the disincentive effect of means-testing on decisions about saving for retirement.

<jf35>Why save, people ask, if the result will be a reduction in benefit entitlement? The Government has listened to this argument, and to the complaints of those who have saved but feel they are little or no better off as a result. The Pension Credit attempts to solve the problem by offering a reward for saving. `The more you save, the bigger your reward' is the sales pitch. Unfortunately, the credit seems as likely to reduce the incentive to save as to increase it.

  5.2  To describe the credit as a reward for saving is, as we have already suggested, both misleading and confusing. It is true that when the scheme starts in 2003 some 5 million pensioners will receive an additional weekly income which, in a few cases, could be as much as £13.80. Even at that stage, however, the reality for many of those concerned will be far removed from the promise of a 60p reward for every pound of savings income. To take two random examples from Annex A of the White Paper, a single pensioner with income from savings or second pension of £30 a week will get a savings credit of £11—a `reward' of only 37p in the pound; and the reward for a single pensioner with £50 weekly income from savings or second pension will be £3, or 6p in the pound. At the lower end of the income scale there will be people who do not qualify for a full Basic Pension and whose other income is, at most, only enough to bring them up to the £77 threshold: they will get no reward at all for their savings.

  5.3  Once the scheme is in operation, the term `reward' will become even less appropriate. A man retiring at 65 in 2003-04 with only the Basic Pension will be entitled to a Pension Credit of £23 to bring him up to the £100 minimum guarantee level. If he has an occupational pension of £20, his Pension Credit will be £8 a week less—£15 instead of £23. Thus, by saving for a 20 occupational pension, he will have increased his total income by only £12 compared with the man who saved nothing. It is true that, under the present Income Support rules, he would not have gained a penny from his occupational pension, so he will indeed be £12 a week better off than if the Pension Credit had not been introduced. Nevertheless, he is likely to feel that, as a result of the means test, his occupational pension is subject to a 40% tax.

  5.4  A 40% tax is of course less objectionable than the 100% tax that recipients of occupational pensions suffer under the present rules; but the Pension Credit will not simply reduce the tax rate from 100% to 40%—it will extend this form of taxation to some 3 million additional pensioner households. This fact is crucially important for people of working age. Until now, most people of middle age or younger could assume that, by paying regularly into a good second pension scheme for the rest of their working life, they would stand a good chance of retiring with an income above the means-tested minimum. In future, with the means test extending further up the income scale, a much bigger pension will be needed to avoid it. People of working age, deciding how much to save for their retirement, will need to take into account the very real possibility - for many a strong probability - of any additional retirement income being taxed at 40%. Moreover, as we have seen, there is a serious risk of the 40% tax rate being increased as the cost of the Pension Credit rises; and if that does not happen, the level of income up to which the tax will operate is likely to rise substantially, bringing still more pensioners into its scope.

  5.5  It is tempting to assume that only a small minority of financially well-informed people will be aware of these facts and that the disincentive effect on saving will therefore be small. It seems to us, however, that financial advisers and providers of pension schemes will have a duty to inform people about such a major factor affecting the outcome of their investment decisions. Even if that were not so, it would be difficult to justify a policy which rested on the assumption that most of those affected by it would be deliberately kept in ignorance of its implications for their future wellbeing.

  5.6  We conclude, therefore, that the effect of the Pension Credit on incentives to save is, on balance, more likely to be negative than positive. We do not believe that tinkering with the scheme will solve this problem. The only solution is to adopt policies which will reduce, rather than increase, the scope of means-testing - which is one more reason for pressing the Government to raise the Basic State Pension, as soon as possible, to the level of the means-tested minimum.

6.  Making the right decisions about pension provision

  6.1  One of the most worrying recent trends in pension provision, both state and private, is the increasing unpredictability of retirement incomes. There must always be a degree of uncertainty about the value of pensions payable in the distant future, but it should be a central aim of pensions policy to reduce that uncertainty to a minimum. This aim seemed to have been achieved to a remarkable extent with the 1975 legislation which linked the Basic State Pension to average earnings, introduced the earnings-related component of the state pension (SERPS), and offered guaranteed minimum benefits for members of contracted-out occupational pension schemes.

  6.2  The situation has changed radically since then. The Basic Pension has become a political football: the earnings link has been repealed and none of the major political parties is committed to restoring it, but all of them are prepared to consider increases in excess of the rate of inflation, at least when a general election is approaching. Thus, while the present Government continues to insist that the pension should normally rise only in line with prices, the 2001 uprating was, and the 2002 uprating will be, more than would have been justified by price rises alone. To add to the uncertainty, the Chancellor of the Exchequer, in his pre-Budget report, announced that the pension would in future rise by 2.5% in any year when the inflation rate was lower than this. It is impossible to make even an intelligent guess as to the long-term effect of that pledge or whether future governments will honour it. The future value of the Basic Pension, either in real terms or as a percentage of average earnings, is therefore totally unpredictable. All that can be said is that it will be worth whatever the Government of the day may decide - which is not much help to people who are now having to decide how much to save for their retirement.

  6.3  SERPS is about to be replaced by the State Second Pension, whose future value is even more uncertain. Initially, it will inherit nearly all the existing features of SERPS, except that it will give a much better return to contributors with very low earnings. But the Government's stated intention is to transform it gradually into a flat-rate pension scheme, starting with younger contributors in about 2006-07. The December 1998 Green Paper, A new contract for welfare: partnership in pensions, however, said, and Ministers have subsequently confirmed, that this change would occur only when stakeholder pension schemes were firmly established. It is not yet clear how successful stakeholder schemes will be in reaching the market at which they are aimed—those earning less than about £20,000 p.a. and not covered by occupational pension schemes. It remains uncertain, therefore, whether stage two of the State Second Pension, when it ceases to be earnings-related, will take place in 2006-07, later than that or not at all.

  6.4  Another major source of uncertainty is the growing prevalence of money-purchase pension schemes, where the value of the pension depends on long-term investment yields and both long- and short-term fluctuations in annuity rates. Few people realise just how vulnerable these schemes are to changes in both the real economy and financial markets, but a few well-publicised failures could soon undermine confidence in them.

  6.5  To these multiple uncertainties must now be added the major uncertainties we have noted above regarding the uprating of the Pension Credit. It is impossible to predict either the levels of retirement income likely to be affected by the credit or the rate at which it will be reduced as income rises. Planning for retirement will become even more hazardous and many people are likely to conclude that it is more sensible to spend their money while they are young and let the future take care of itself.

7.  The impact of the Pension Credit on pensioner poverty

  7.1  Poverty reduction is not the sole, or even the main, aim of the Pension Credit. Nevertheless, it will, initially at least, provide a relatively small but welcome increase in the incomes of some 5 million pensioners. Of these, the White Paper (page 7) says that 1.2 million will gain from the improvements to the guarantee - ie they will have incomes below the new minimum guarantee levels of about £100 for a single person and £154 for a couple. The effect of the credit will be to raise their incomes above the MIG, thus undoubtedly reducing pensioner poverty. Even among this group, however, if reduction of poverty were the sole aim, a straight increase in the MIG would be more effective, giving equal amounts to all those on the minimum, rather than discriminating in favour of those with income from savings or second pensions.

  7.2  The majority of those benefiting from the credit will be pensioners with incomes above the MIG level who will qualify for the savings credit. By any reasonable definition, many if not most of them could be described as poor but, unlike those on the MIG, they would benefit fully from an increase in the Basic State Pension and could therefore be helped without extending the complexities and disincentive effects of means-testing to half the pensioner population.

  7.3  The White Paper (page 6) stresses the advantages of the Pension Credit for women, who tend to have smaller occupational pensions than men and are `at greater risk from the relative decline in their pension income over their retirement because they tend to live longer than men. Two-thirds of those entitled to the Pension Credit will be women and half of these women will be aged 75 and over.' It is certainly true that most poor pensioners are women, but many of the poorest women pensioners will gain little from the Pension Credit. The fact that they tend to have smaller occupational pensions means that the savings credit will be of less value to them.

<jf35>Moreover, the relative decline in their pension income (including, it should be noted, the Basic State Pension) as they get older will result in a similar relative decline in the value of their savings credit.

  7.4  The most glaring gap in the Government's proposals, so far as women are concerned, is the fact that, although the state pension age for women is still 60 and will remain so until 2010, rising to 65 between 2010 and 2020, the savings credit will not be available to those aged 60-64. The White Paper (page 6) says: `In order to comply with our legal obligations on equal treatment, the guarantee element will be payable to both men and women at age 60, and the savings credit element will be payable to both men and women at age 65.' The November 2000 consultation paper said nothing about this difference in starting ages, giving the impression that all pensioners with incomes at the appropriate levels would benefit from both parts of the credit. The Government, it seems, has now decided that men under 65 should not receive the savings credit and, therefore, nor should women. Presumably the reason for that decision is that most men under 65 are not pensioners; but the fact is that many men have to retire at 60 or earlier on relatively small occupational pensions, on which they have to manage until they are 65. We do not see why they should be denied the benefit of the savings credit. Whatever the reasons for excluding men aged 60-64, however, it is plainly absurd to tell a woman claiming her state pension and Pension Credit at 60 that she will have to wait five years to receive the promised reward for her savings. Unless this anomaly is removed, the Pension Credit will do nothing to reduce poverty among single women pensioners under 65.

7.5   One way in which pensioners may be able to supplement their pension income through their own efforts is through part-time employment. It should not be necessary for them to do so, but nor should they be discouraged from taking part-time work when the opportunity arises, as it may increasingly in the years ahead. We have noted that, under the 1948 regulations, pensioners could almost double their income through part-time earnings without any reduction of national assistance payments, while today's pensioners can earn only £5 a week (or £10 for a couple) without every additional £1 of earnings being deducted from their Income Support. One of the most attractive features of the Pension Credit, as presented in the November 2000 consultation paper, was that earnings were to qualify for the 60% disregard. Thus, the first example of how the credit would work, on page 19, was that of a man aged 70 whose income consisted of the £77 Basic Pension and £20 part-time earnings, £12 of which would be disregarded instead of only £5. But the Government seems to have had second thoughts about this proposal. The Explanatory Notes on the Bill state the Government's intention that `qualifying income' (to be defined by regulations under clause 3(6) of the Bill) should, broadly, be income arising from national insurance contributions (eg retirement pension) and the claimant's own retirement provision (eg occupational or personal pension or income from capital). Earnings, it appears, will not be included. The White Paper merely notes the existence of `small earnings disregards in the Minimum Income Guarantee' and adds: `We are continuing to consider the treatment of earnings in the Pension Credit.'

  7.6  The present £5 earnings disregard is plainly much too small to constitute an incentive to seek or accept part-time employment. Rather than including earnings in the types of income qualifying for the 60% disregard, it would be simpler and more effective to retain a separate earnings disregard but raise it to a level (say £40) which, in most cases, would allow at least half a day's work per week without any loss of benefit. In this way, part-time earnings could have a significant impact on pensioner poverty, if only in a minority of cases.

8.  Claiming and assessing entitlement; likely levels of take-up

  8.1  The National Pensioners Convention remains convinced that the policy of relying increasingly on means-tested benefits to meet the needs of pensioners is misguided. Regardless of the numbers involved, however, it is obviously right that everything possible should be done to ensure that those entitled to such benefits receive them. We therefore welcome the emphasis placed on this aspect of the Pension Credit.

  8.2  Past attempts to promote the take-up of means-tested benefits have produced disappointing results. The most recent—the campaign to encourage take-up of the MIG—is said to have resulted in `over 120,000 more pensioners receiving an extra £20 a week' (10 December 2001, Official Report, column 600W). But official take-up statistics suggest that the number of entitled non-claimants before the campaign started may have been around 500,000. Past experience suggests, also, that campaigns of this kind tend to produce only short-term improvements.

  8.3  The consultation paper on the Pension Credit set out the Government's long-term aim: `to take tax and benefit integration further, in particular: to make receipt of the Credit more automatic; to take steps to reduce overlap between the two systems; and ultimately to merge support for older people through the Credit and the tax system to create a seamless and integrated system of support.' The White Paper takes up the same theme: `The aim is to move progressively towards a system where pensioners can automatically receive all of their entitlements.' The present situation, however, falls far short of that ideal. Before they can receive Income Support, pensioners have to be persuaded to make a claim, providing full information about their financial situation, and the same procedure will apply to the Pension Credit. The length and complexity of the Income Support claim form is known to have discouraged claims in the past. The recent introduction of a new and shorter form should encourage more claims; but the amount of information required remains essentially the same. The development of the telephone claims service may have a bigger impact, but many people who have difficulty with form-filling may find it equally difficult to provide detailed financial information on the telephone.

  8.4  The proposal to award the Pension Credit for periods of five years will provide greater stability once the initial award has been made, but will not in itself increase the rate of take-up.

  8.5  We doubt, therefore, whether the measures set out in the White Paper will raise the take-up rate for the Pension Credit to anywhere near 100%. It seems more probable that, with more than twice as many pensioners qualifying, the number of non-claimants will increase substantially. It would certainly be unwise to assume that the take-up problem is about to be solved.

9.  Conclusion

  9.1  The Government's pensions strategy relies heavily on means-tested benefits to fill the gaps in state and private pension provision. The Pension Credit is an attempt to counteract the resulting disincentive effect on saving for retirement. The method used to achieve this aim is relatively simple: a big increase in the amounts of income and capital disregarded for the purposes of the means test. It has been made to appear far more complex by the decision to present the resulting increase in benefit entitlement as a separate benefit: the savings credit.

  9.2  While the immediate effect of the proposed disregard of 60% of pension and savings income above the Basic Pension level will be equivalent to a reduction of the tax rate on such income from 100% to 40%, the number of people affected will be hugely increased. People of working age will have to take this into account in planning for their retirement, and pension scheme providers and advisers will have to ensure that their customers are informed of the implications.

  9.3   There are major uncertainties regarding future uprating of the Pension Credit, which, added to existing uncertainties about the future value of the Basic Pension, the State Second Pension and money-purchase pension schemes, will make pension planning extremely hazardous. Many young people may conclude that it is better to spend their money than to save it for such an uncertain future.

  9.4   While there is clearly a case for an increase in disregards (including earnings disregards), we would prefer to see the problems arising from means-testing tackled in a more radical way, by measures to raise pensioners' incomes above the level at which means-tested supplements are necessary.

Rodney Bickerstaffe


January 2002

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