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BeeHive  >  BeeLines  >  One too many postings...

One too many postings...

I’d given up on the so-called ‘Battle of the Blogs’ really; it didn’t seem to be getting anywhere, just me and the current minister seemingly agreeing we’re both right from where we both happen to be standing; nothing constructive.

Then, with it behind me, my unanswered postings turn up on the DWP weblog after all; and answered with another non-answer, but with thanks for "engaging in the debate". But also raising a point I can’t ignore regarding the way some people are lucky enough to be able to undo their unsuitable pension savings utilising the post A-Day triviality rules. It seems that after spending so long thinking about what I said before the DWP seems to think this is the answer to the inequities we’ve been talking about. The answer that makes pension saving for all (and the careless distribution that will go with it) a suitable proposition after all. So I have to get back on the merry-go-round.The posting on the DWP weblog1is called Fair's fair for some reason and you can get to read it if you click the highlighted link. But if you can’t be bothered to do that on a wet Monday evening you can just read on here; I’ve cut and pasted it into this BeeLine to make things easier for you – I know; I’m all heart when it comes down to it:

Some of you will have been following my discussion with Steve Bee about means testing and incentives to save. I’d promised that we would publish further information on those issues , and you may have seen that we published the first part of that research – Projections of Pension Credit Entitlement– two weeks ago. This paper explains DWP’s forecasts in the White Paper that about a third of pensioners would be on Pension Credit by 2050, compared to 70 percent without reform. It explains the assumptions and how our model works, and tests the outcomes to see how sensitive they are to varying some of the key assumptions.

We’ll shortly be publishing, as promised, our analysis of financial incentives to save in personal accounts.  Since this will provide an in-depth analysis of the points Steve made, I thought that would be the most helpful answer.  But in Steve’s last post on this, he is disappointed that I haven’t replied to his earlier post.  So, I’m happy to pick up his specfic point in the meantime.

For those unfamilar with means testing, here’s how it works. When calculating Pension Credit entitlement, we take people’s retirement income into account – broadly, that includes income from a State Pension and private pension. We also consider capital, but only capital above £6,000 (or £10,000 for people who live permanently in a care home), this means savings below that level are completely ignored.

So, very simply, someone  who has £75 from their State and private pensions gets topped up to £114 per week. Someone on £120 a week would get topped up to £135.50.  Steve’s complaint is that the person on £75 would still have got £114 a week if they hadn’t saved. Steve therefore suggested ignoring incomes from modest pension savings of those with no other financial assets, assuming those with higher pension savings are also more likely to have other savings or capital that would take them above Pension Credit.

Sounds pretty reasonable but, in fact, I’m not sure it would be fair.

People with similar levels of income or capital could see vastly different outcomes depending on their saving decisions. For example ignoring pensions but not other savings products, would mean two people with about the same retirement incomes could be entitled to different amounts of Pension Credit.

That would be hard to justify. How would we explain to the person who had put money in an ISA that they were getting less money than the person who had put the same amount in a pension?  You could end up with people who had saved less being better off than their neighbour who had saved more.

John Lawson, the Head of Pensions Policy at Standard has also put a suggestion forward, which is in the same territory. His idea is that we could automatically enrol poor and older people into special cash ISAs, but these wouldn’t be means tested.  Again, there might be a danger here of skewing the savings market by treating different types of capital differently. 

However, it may be that our reforms already have a similar effect, through my favourite topic, the trivial commutation rules – these would allow people in these groups to take small pensions as a lump sum, up to £15,000.  This woud particularly benefit the very poorest and people who started saving close to retirement.

I note Steve has now called time on his "battle of the blogs". But I’m grateful to both him and John for engaging in the debate. At the very least, anyone logging in to our discussion has benefited from a crash course in both pensions policy and our reforms. And that can only be a good thing.

PS – Steve did make one final point about returns on investment.  As he says this is back to where this discussion started, so I doubt we’re going to agree. But my argument is that there is a difference between income tax and Pension Credit – tax takes money away, Pension Credit gives you more money. So, we could ensure the very poor have no  means test on any savings – Steve’s "£1 for  £3.33″ – by abolishing Pension Credit. But if that meant they had £85 a week, say, rather than £125 a week, I’m not sure they’d thank us

Given unlimited amounts of money, we could of course have a system without any means testing. You would just give everyone the amount that you thought the poorest needed. But that isn’t affordable – the NPC’s proposal to give everyone £114 per week, for example, would roughly cost 5p more on the Basic Rate of income tax.

We are spending more money on pensions – £10.5 billion more than  under the policies we inherited in 1997. And our reforms will mean continuing to increase the amount of national income that goes to pensioners.

But we do not think it would be right to give all pensioners the same amount, regardless of income. Instead, we have targeted it, so that the poorest get more. Or to put it another way, poorer pensioners  are £2000  per year better off than they would otherwise have been, compared to the average earner, who is £1,400 better off.  Targeting resources requires a means-test – and I hope those figures explain why we’ve followed this policy. If we just took the existing budget and used it to raise the basic State Pension the poorest third would lose £500 a year.  And, as I said, I don’t know many people who would welcome that.  That is why most models of public pension reform that have been put forward include some form of means-tested safety net. 

You’ll know, I guess, why I can’t ignore some of the things said there. I’d like to if I’m being honest, but I can’t really. So I’ve put the following posting on the minister’s weblog this afternoon. Not to continue things pointlessly, but just because certain things just shouldn’t be left unsaid:

James,

I was surprised to see you return to our Battle of the Blogs; I hadn’t meant to continue with it. But in your posting you make two contradictory points I really feel I must respond to. Firstly you say this about the serious suggestion I made that pension savings should not be counted against means-tested handouts:

People with similar levels of income or capital could see vastly different outcomes depending on their saving decisions. For example ignoring pensions but not other savings products, would mean two people with about the same retirement incomes could be entitled to different amounts of Pension Credit.

That would be hard to justify. How would we explain to the person who had put money in an ISA that they were getting less money than the person who had put the same amount in a pension?  You could end up with people who had saved less being better off than their neighbour who had saved more.

While it’s ironic to hear you arguing that differing outcomes for neighbours is unacceptable (exactly where I came at the injustices of the way the means-test works in the first place if you remember), I’m not sure you’ve grasped the point about the way pension savings differ from other types of saving. Basically, you can’t undo a pension pot; it’s sort of a one-way ticket. Once you’ve put money into a pension, it’s stuck there even if you later find out that it was a dumb place to put your money.

This is the essence of what I’ve been going on about in our previous exchanges and I’ve tried so hard to get you to acknowledge. Someone with savings in an ISA who finds out later in life that those savings are acting against their best interests (and that as a result their non-saving neighbours receive better treatment than they do from the means-tested state support on offer) can simply disinvest those savings. Spend them on a holiday or a new kitchen or something frivolous if that’s what they want to do. People with pension savings that are made in good faith, but turn out to be of no earthly use to them don’t have that same option; they have to buy an annuity with their savings whether it’s an economically sensible thing to do or not. That’s the whole point really. The point I don’t think is getting across. And yet…

…in the same posting you go on to say this:

However, it may be that our reforms already have a similar effect, through my favourite topic, the trivial commutation rules – these would allow people in these groups to take small pensions as a lump sum, up to £15,000.  This woud particularly benefit the very poorest and people who started saving close to retirement.

And that’s the point I can’t leave unanswered. This part of the recent pension tax reforms you say is your favourite, that you say is so helpful to ‘these groups’, the trivial commutation rules that allow people to disinvest useless pension savings below the value of £15,000, are indeed a good answer to some of the problems created by the unfair way that means-testing works. But that new rule doesn’t go far enough to help all the people likely to be affected by your proposal to sweep millions into pension saving. It also has the worse effect of making the injustices even harder for people to bear.

The example you have used in your posting (another unfortunate one if you are trying to help your own argument, if you don’t mind me saying so) shows exactly what I mean when saying this. This is the example you used:

So, very simply, someone  who has £75 from their State and private pensions gets topped up to £114 per week. Someone on £120 a week would get topped up to £135.50.  Steve’s complaint is that the person on £75 would still have got £114 a week if they hadn’t saved.

If the person in your example is a 60 year old woman whose National Insurance record buys her just £50p.w. basic state pension (not an unusual case by any means), the guarantee credit will give her an extra £64.05 p.w. thus taking her income up to £114.05 p.w2.

If this lady had enough private pension savings to buy herself another £25 p.w the state top up would reduce to £39.05 p.w., effectively taxing her private pension at 100%. I know we don’t agree it’s a tax, but she would get no value at all from her pension savings and I just struggle to find a better word in the dictionary that explains the action of doing that to someone.

It is this type of outcome that I think is so inequitable and I really don’t think anybody who thought they would be in for a tax at 100% on their savings would happily save in the first place unless they really didn’t know what was going on, or really didn’t need their money.

The cost of your lady’s private pension would be over £25,000 (the accurate figure is actually £25,676)3 – which is not a trivial amount. (That’s me being ironic by the way.) But what I’m getting at is that your favourite part of the way your new reforms are all coming together, the way the triviality rules allow disinvestment of useless pension savings, wouldn’t help her one bit. She would simply lose the whole value of a £25,000 investment. She could have got a good kitchen for that, or had some great holidays, or done any number of life-enhancing things with it rather than see it go up in smoke before her eyes. You worry in your response on your weblog ("How would we explain to the person who had put money in an ISA that they were getting less money than the person who had put the same amount in a pension?"), but how on earth do you think you’re going to be able to explain to someone that substantial savings of twenty-five thousand pounds will not make them a penny better off than non-savers and you won’t let them have their savings back either? That’s a far bigger thing to worry about, surely?

The lady in your own example wouldn’t even be able to get back the first £15,000 of her wasted savings either. So it’s a double hit. People below the triviality limit of £15,000 are given a ‘get out of jail free’ card as far as their useless pension savings are concerned. People with more than £15,000 don’t get a penny back even if their pension savings are of no use to them whatsoever.

It was for exactly this reason that we suggested to one of your predecessors three years ago that the triviality limit should be set as a higher percentage of the Lifetime Allowance than the 1% you eventually plumped for in your reforms.(Scottish Life's views on the commutation of trivial pensions and suitability)4. That serious suggestion was rejected, much in the way you currently reject our suggestion that pension savings could be made invisible to the workings of the means-test, but a triviality limit of 4% of the Lifetime Allowance, for example, would have given us a limit of £60,000 today; which would I think be much more like it.

I take heart, though, from the fact that you have used these words in your response "my favourite topic, the trivial commutation rules – these would allow people in these groups to take small pensions as a lump sum". If it really is your favourite topic and if you really do think it is a good example of how the various pension reforms work in a joined-up way, then would you be prepared to go as far as disagreeing with your long line of recent predecessors and recommending to your colleagues in HMRC and the Treasury that the triviality limit should be increased to a more sensible level?

Are we really "engaging in the debate", or are we just exchanging words on the internet and using up time?

Steve Bee

27 November 2006

Sources:

1.  Department for Work and Pensions Reform blog 22 November 2006.

2.  The Pensions Advisory Service website.

3.  FSA website - Comparative Tables    

4.  BeeHive - Political papers March 2003

 

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