Sunday Times December 05, 2004
Pension saving could be ?pointless¹ David Budworth
SAVING for retirement could be pointless for millions of people because of the spread of means testing, experts warned last week.
Gordon Brown, the chancellor, affirmed his commitment to the means-tested pension credit in his pre-budget report. He promised to raise the credit next April in line with earnings.
But Brown faces mounting criticism from pensions experts and MPs.
Ros Altmann, a pensions consultant, said: ³Pensions are going to be pointless for the majority of people if the pension credit is left in place.²
The pension credit was introduced in October 2003 as a means-tested top-up to the basic state pension. People who have no savings get the full pension credit of £25.85 a week, or £1,344 a year. With the basic state pension of £4,139, their total income would be £5,483.
The credit is then tapered, so you lose 40p in benefits for every £1 of income from a company or personal pension. Couples with a pension fund at retirement of about £90,000 will get nothing.
Labour trumpeted the credit as a reward for saving, but many experts believe that it acts as a deterrent and have called for it to be replaced.
Julie Stark of the Association of British Insurers said: ³The credit discourages people from putting money aside for retirement because it amounts to a 40% tax on saving. We would like to see it replaced with a system that would allow most people to avoid means testing. ²
Even members of the government have acknowledged that the credit is contributing to the pensions crisis. Alan Johnson, work and pensions secretary, said: ³I¹d be crazy to say it doesn¹t act as some disincentive to some people.²
The Institute of Fiscal Studies (IFS) calculates that 73% of all pensioners will be subject to means testing within 20 years.
A 30-year-old man would need to plough at least £330 a month into a pension until the age of 65 to escape the credit altogether, according to Mercer Human Resource Consulting.
A 40-year-old would need to put away at least £420 a month and by age 50 would need to save a monthly minimum of £610 to fall outside the means-testing net.
David Willetts, shadow work and pensions secretary, said: ³We have to reform state benefits so as to reverse the spread of means testing. We need a benefits system that reinforces people¹s best instincts ? to save and to provide for themselves and their families.²
A single person aged 65 with no savings would get the full credit, plus the basic state pension, taking their income to £5,483 a year.
If they saved £1,200 a year for 20 years, they would build up a pension fund of £41,000. They could expect an annual income of £2,080 on top of the basic state pension and would get £512 pension credit, taking their income to £6,731 a year. So, by giving up £1,200 a year during their working life, they will have ended up only £1,248 a year better off in retirement.
Deborah Cooper of Mercer Human Resource Consulting said: ³Even people who have saved throughout their working life will not be much better off at retirement than someone who has made no provision at all.²
The spread of means testing will make it difficult for savers to get advice on pension planning. Tom McPhail of Hargreaves Lansdown, an adviser, said: ³It¹s harder to give advice now we have to consider the pension credit. It¹s particularly difficult to advise families, because the means test is based on household income.
- Click here to find out more! ³How much pension credit you get will depend not only on how much you save, but also on how much your wife or husband saves ? and whether the relationship survives.²
Many financial advisers are reluctant to recommend pensions for fear of future claims of mis-selling. Some experts even suggest that the government could be accused of mis-selling.
Altmann said: ³The government should not continue to promote pensions without pointing out the dangers of the pension credit. If it does, it could rightfully be accused of misleading savers, which could be the biggest mis-selling scandal ever.²
Some experts recommend you put your money into more flexible schemes such as Isas. You can then withdraw it whenever you want and you do not have to buy an annuity. Steve Bee of Scottish Life, an insurer, said: ³Isas and other savings and investments count towards the means test. But they are easier to access, so you can spend the money before retirement if you¹re going to lose out.²