Many people saving for their retirement will not be any better off, warns the Pensions Policy Institute, as the money they have managed to tuck away will simply replace state benefits that would otherwise have been payable.
This problem also affects consumers saving a fair bit towards their pensions, as the first-third of their savings will be caught in the "means-testing trap", replacing what the Pensions Credit would have given them.
Latest PPI Briefing Note - Why is it so difficult to save for retirement? - suggests many people will find themselves 'losing' out on their savings in the future given the low level of average pension saving, which will only be enough to cover the amount they would have received from the Pensions Credit if they wouldn't have saved at all.
For example, a man who starts working at the age of 21 and retires in 2028 at the age of 65 with no private pension savings, would be entitled to Pensions Credit.
However, if the same man had saved 20% of his salary from the age of 41, he would not have been eligible to the extra state benefit. While he would have been better off compared to if he would not have saved anything at all, one-third of his savings are lost as it would simply replace what the Pensions Credit would have given him, the PPI says.
A report by the PPI published last year estimates that between 60% and 75% of pensioners may be eligible for the Pensions Credit by 2025.
However, as more and more people become dependent on the added benefit, the government has created another obstacle for people to save as more money will be needed for the state pension system.
"A large proportion of pension saving will [therefore] simply replace state benefits that would otherwise be payable," the PPI says.IFAonline
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From 6 April 2019
Marcus Brookes appointed CIO