Select Committee on Treasury Eighth Special Report


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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