Personal accounts will go ahead with means-testing in place as there is no viable alternative, claims the government.
Robert Laslett, chief economist at the Department for Work and Pensions (DWP) made the comments at a seminar on ‘Incentives to Save in Personal Accounts’ which was arranged by the government to answer concerns over the level of means-testing which will be left in the pensions system following the state reforms.
Many in the industry believe the means-testing element of the state system will mean for many people it will not pay to save in personal accounts as the Pensions Credit will act as a 40% tax on their savings, with Steve Bee, head of pensions strategy at Scottish Life, starting an e-petition on the issue on the Prime Minister’s website, which currently has over 800 signatures.
However the government has argued the reforms currently going through Parliament in the Pensions Bill will bring the number of people expected to qualify for means-testing down to around 28% in 2050, from around 45% now.
In addition its says the worst affected people will be those who are on the Guarantee Credit part of Pensions Credit only, which it argues will only be 1 in 50 by 2050, with many of these able to take their personal accounts savings as a lump sum under trivial commutation rules.
But the Pensions Policy Institute (PPI) revealed in their own presentation that the number of people who will be on Guarantee Credit only in 2050 will be around 13%, more than double the 6% estimated by the DWP modelling.
And the independent think-tank also stood by its modelling figures which suggests although the state reforms will reduce the number of people affected by means-testing if the current system would continue, it claims 44% would still qualify for Pension Credit, compared to the 28% figure presented by the government.
The PPI points out “projections of Pension Credit eligibility in 2050 are inherently uncertain, and in particular projections of those on Guarantee Credit only”, although it warns it is “essential to recognise there is a range of plausible outcomes for Pension Credit”.
However despite the disparity over the figures the DWP warns there is no alternative to personal accounts and auto-enrolment, with Laslett arguing a lower Guarantee Credit would expose more pensioners to poverty, while less Savings Credit would expose more low income pensioners to higher withdrawal rates.
And he claims other alternatives such as increasing Savings Credit would potentially be effective, but would go against the aim of the state reforms to provide a clearer savings environment, while removing auto-enrolment from personal accounts would lead to continued high levels of undersaving.
Laslett argues personal accounts will offer a better return on saving, especially for those on low and moderate income, than other products, while people who receive Savings Credit could still expect a positive return from their savings.
However he admits it will be difficult to predict in advance exactly who will retire onto the Guarantee Credit, and as a result says it will be important to provide individuals with the right information.
John Lawson, head of pensions policy at Standard Life, says there are still a lot of concerns about this issue in the industry, but says the biggest danger he see is the number of potential ‘scare’ stories written in the run up to 2012 which will have the effect of encouraging a lot of people to opt out rather than just those for whom it doesn't pay to save.
He adds: “My view is someone needs to get back 5/8ths or 62.5% of their savings to make personal accounts worthwhile, which represents their contributions plus tax relief. Yet the withdrawal rate of 40% on savings credit makes this impossible to achieve. If they could get the withdrawal rate down to say 35%, this could solve a lot of problems.”
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