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BeeHive  >  BeeLines  >  2009  >  April  >  Means-Testing can make increasing pension savings worthless: Official

Means-Testing can make increasing pension savings worthless: Official

Youíre aware, Iím sure, that I think means-testing and the way it can devalue the private pension savings of some people is the biggest problem we have today in our pension system in the UK. Anyone who ends up in receipt of means-tested handouts in retirement will see the value of their pension savings reduced by at least 40% and in some cases could even lose the whole value of their pension savings altogether.

Let me put that another way. While saving in a private pension could mean that someoneís pension would increase, for some people overall income may not because of the interaction with income related benefits, such as pension credit, housing benefit and council tax benefit.

Theyíre not my words, by the way, Iíve sort of borrowed them from something that was said in Parliament last week in reply to a question on the expected take-up of additional Class 3 National Insurance Contributions. Youíll find the words if you look carefully in this excerpt from Hansard:

Steve Webb: To ask the Secretary of State for Work and Pensions pursuant to the answer of 25 November 2008, Official Report, column 1384W, on national insurance contributions, for what reason the estimates assume a 20 per cent. take-up rate; and if he will make a statement. [257081]

Ms Rosie Winterton: National Insurance contribution data were used to show which people had eligible blank years on their record since 1975.

We found that around half a million individuals reaching state pension age between 2008 and 2015 could increase their entitlement to basic state pension by purchasing deficient years from earlier in their working lives.

While basic state pension entitlement could increase, for some people overall income may not because of the interaction with income related benefits, such as pension credit, housing benefit and council tax benefit. Married women also need to consider how much state pension they are entitled to, based on their husband's record, and when they will get it.

Taking these factors into account, along with evidence from a previous Class 3 related exercise, our estimates assume a take-up of 20 per cent.

So, and just to make sure we all understand, the Government isnít expecting many people to take up the option of paying additional Class 3 contributions even though their records show that half a million people could increase their basic state pension by doing so. Thatís because, even though their pensions would increase, they wouldnít be one penny better off as a result. So the expectation of the number who will take up the offer of paying more to increase their pensions is relatively low.

I can understand that. What I canít understand, though, is why there arenít similarly low expectations of the number of people who will take up voluntary pension saving after 2012 once the new pension laws kick in.

Steve Bee

7 April 2009

Source: Commons Hansard, 1 April 2009

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