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BeeHive  >  BeeLines  >  2009  >  November  >  A solution to the means-testing problem

A solution to the means-testing problem

Well, and yes I suppose itís time, Iím returning once more to the means-testing problem that will soon haunt our new world of pensions come 2012. What means-testing problem? Well, the one I had an ongoing public scuffle with a pension minister about all those years ago really (Battle of the Blogs Revisited) Ė itís a problem that is better understood by politicians today than it was back then, but weíre no nearer a solution to it.

It comes up from time to time when Iím doing the rounds at pension conferences and it seems to me that the issue needs to be nailed once and for all before ten million or so more employees end up getting auto-enrolled into pension saving.

Iíve got a way it could be done both easily and quickly and itís something our MPs should consider carefully. The only way it seems to me that employers and financial advisers will ever be able to stand up in front of employees in the workplace and recommend that they all join a workplace pension scheme is if there is no way that pension savings could be devalued by the receipt of means-tested handouts in retirement. (A potential 40% reduction in the value of your pension savings would surely outweigh any marginal advantage offered by even the cheapest charges available to employees.) But thereís no way weíre ever going to be able to eradicate means-testing, so the problem has to be solved from the other end; from the pension savings end.

How about this for just such a solution?The Trivial Commutation limit is currently set at 1% of the Lifetime Allowance. What about increasing that to 4% so that anyone who reaches retirement only to find that their pension savings are of little or no use to them because of the drop in value due to the means-tested entitlements available to non-savers would have the option of undoing their pension andgetting their money back? That would do the trick, it would only need the tiniest tweak to the current legislation, and we would be able to say to all those about to be auto-enrolled into pension saving that they wonít end up regretting it.

The legislators could go further and stipulate that people could only use the Trivial Commutation level of 4% (rather than 1%) if they could demonstrate that the loss of value in their case is due to the effect of means-tested support available to them. If the government people are right in their assertion that the means-testing Ďproblemí is miniscule then there would surely be nothing to lose by introducing such a safety net. But the advantage of that safety net being in place is that it would be enormously helpful to employers and advisers acting at the point of auto-enrolment to encourage the take-up of workplace pensions.

Itís a win/win option isnít it?

Steve Signature

26 November 2009

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