APPENDIX 2
LETTER FROM THE FINANCIAL SECRETARY, HM
TREASURY, TO THE CHAIRMAN OF THE COMMITTEE
(SEE Qq 2186, 2191 AND 2192 OF HC 71-II)
PENSION CREDIT
When my predecessor gave evidence to the committee
on 28 June she agreed to write setting out more fully the Government's
judgement about the effect of Pension Credit on incentives to
save. I am sorry that was not done before the Recess.
The Government aims to ensure all pensioners have
a decent and fair income in retirement and that they share in
the rising prosperity of the nation. We aim to promote saving
for old age and to ensure people have opportunities and incentives
to do so and we have taken a number of important steps in this
direction. The Government is also determined (and has done a
great deal) to tackle pensioner poverty while ensuring that the
state pension system remains sustainable.
We designed Pension Credit with all these considerations
in mind. Pension Credit tackles pensioner poverty, easing the
highest marginal deduction rates faced by pensioners (which tend
to undermine incentives to save) and keeping our system sustainable
in the long term. It is an innovative approach to a familiar
problem - the tension between the need to ensure there is a floor
below which pensioner incomes do not fall, and the need to ensure
that people are rewarded for saving.
Pension Credit rewards pensioners aged 65 and over
who have made modest provision for their retirement by giving
them extra benefit above the guaranteed level of up to £15.51
a week for single pensioners and up to £20.22 for couples.
This ensures that pensioners who have saved and have income above
the level of the basic state pension are better off than they
would be if they had not saved. Many pensioners who have saved
will now be eligible for extra help as a result of the introduction
of Pension Credit but would have received no reward for saving
under the Minimum Income Guarantee (MIG).
Under MIG 1.8m pensioners faced a 100% withdrawal
rate. This means their benefit entitlement was reduced pound
for pound for any extra pensions or savings they had built up.
For those entitled to Pension Credit we estimate around 940,000
of pensioner households could have a 100% taper. The remaining
860,000 pensioner households that became entitled to Pension Credit
will now have a taper of 40% or more (but in no circumstances
as high as 100%) under Pension Credit. Others who were not entitled
to the MIG but are now entitled to Pension Credit gained overall
but have similar tapers.
When we were introducing Pension Credit we sought
the views of the Financial Services Authority on the effect Pension
Credit would have on incentives. They said then, 'The Pension
Credit will mean that for most people most of the time it will
pay to have saved.'
Therefore a choice to postpone expenditure until
retirement does not reduce lifetime consumption and can increase
people's satisfaction if it helps them to meet whatever aspiration
they may develop for their living standards in retirement.
There is little information on how people make decisions
about saving for retirement or how the availability of state or
private pension provision affects this. The Government recognised
last year in its response to the Work and Pensions Select Committee's
Third Report on The Future of UK Pensions that it is important
to improve our understanding of savings decisions and how savings
incentives work.
These are complex questions and we want to engage
with academic and other experts on how best to assess the influences
on savings behaviour. This is an area that is currently being
considered as part of forthcoming programmes of work. The Government
has already established the independent Pensions Commission to
monitor and keep under review the voluntary system of private
pensions and long term savings.
Stephen Timms
Financial Secretary
HM Treasury
27 September 2004
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