Policy on S2Ps/stakeholder switching may not be in investors' best interests
The Government should pay for advice for people who are considering contracting out of state second pensions (S2P) into stakeholder, according to the Institute for Public Policy Research (IPPR).
The social policy research group noted in its report, A New Contract for Retirement, that the Government is in danger of being involved in a mis-selling scandal because it is advocating that people should move out of S2Ps and into stakeholder. In many cases it is unclear whether it would be in the best financial interest of many to do so, the report said.
Peter Robinson, senior economist at the IPPR, said the current rebates for transferring out of S2Ps are not high enough to make it a clear advantage to move out of state pension provision and into a stakeholder.
He said Alistair Darling, secretary of state for work and pensions, had advocated on television that people should be transferring their S2Ps into stakeholder. Robinson said the advice could constitute mis-selling and the Government should foot the bill for investors to obtain advice as it was Government policy which was encouraging them to contract out.
The IPPR also criticised the Government's pension credit plan aimed at rewarding individuals who save for their own pensions rather than relying on the minimum income guarantee (MIG). It said that for it to work means testing would need to be simplified. The proportion of people being means tested will increase to about 65% of single pensioners and 51% of couples by 2025, according to the report.
Robinson said the complexity and cost of the proposed pensions credit caused by additional means testing will add to the lack of transparency in the current pension regime. He added: 'It is the nature of such means tested provision that makes the impact on incentives ambiguous. For some the incentive to save will be improved, for others it will be worsened, but for most the impact will be unclear.'
The cost of the pensions credit also needs to be debated in public as the Government has yet to reveal what it will amount to, Robinson said. He added: 'It has been independently estimated that the pensions credit will increase public spending on pensions by one percentage point of GDP by 2050. As a result, total Government spending on pensions and related benefits is set to rise from about 5% of GDP to 6% by 2050, in contrast to all previous projections which had public spending falling as a proportion of GDP.'
Concern about stakeholder was also highlighted by the IPPR, which believes failure to reach the target market is the biggest issue hanging over the new product. Robinson said that those on a low income may find it more attractive to keep savings liquid in a product such as an Isa rather than the low-cost scheme. The IPPR is advocating that consideration should be given to making membership of schemes compulsory unless people opt for other private provision.
The report outlined a number of options for amending pensions policy within the current regime as well as more fundamental ideas for policy review. Among the more minor changes is increasing the MIG to a level which would genuinely keep people above the poverty line.
Other options included looking at whether the basic state pension should be raised to the level of the MIG and then indexed to that level, which should be seriously considered for those above 75, as it could prove to be affordable. Robinson said that a significant increase in the Basic State pension could make the pensions credit and the S2P redundant.
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