View more on these topics

Credit will be a liability

Making financial decisions is never easy. There is always a lot of thinking to do, whether the decision is which fund to buy, which pension vehicle to choose in planning for retirement or whether to invest those extra savings in the stockmarket or property.

But the big decision that working-class Britain will be forced into thinking about before long is whether or not to save for retirement. It seems like a simple enough decision but the recently introduced pension credit has, believe it or not, made it a very difficult decision indeed.

Around 5.3 million pensioners have recently been given the go-ahead to claim the pension credit, which is replacing the minimum income guarantee.

It is widely recognised that change was long overdue but what has been forgotten is the reward for lifelong saving.

The introduction of the pension credit has thrown many into a spin because people who have saved all their lives may be unfairly disadvantaged in retirement.

The reason that lower to middle-income earners will be mightily confused is because the pension credit seems to contradict the work done by the Government in recent years in creating a savings culture.

The credit promises to provide an income of at least £102.10 a week for pensioners who live alone or £155.80 for couples. However, those who have taken up the savings message and made moves to build up their own pension pot throughout life are set to be penalised.

The pension credit is sending out the wrong signals to a large part of the population – do not worry about saving, the Government will look after you.

With the UK pension system in disarray and a national savings gap of around £27bn, there is no doubt that the system was in need of a facelift.

The Government&#39s stakeholder scheme, announced in 1998 and introduced three years later, went part of the way in addressing the need for people to save as it provided a low-cost route for saving.

Stakeholder pensions were presented as a crucial component in the Government&#39s long-term plan to provide access to a good value pension. It has had its fair share of criticism, particularly in terms of take-up figures, but there have been success stories.

However, the very possible reality is that what savings culture that stakeholder has managed to create could be destroyed. If those who have never put a penny aside for their retirement are taken care of by the Government, there will be little incentive to save for those still working. Employees who have embarked on a long-term savings plan through stakeholder could just give up saving altogether.

It is estimated that for an individual to be clear of any penalty under the pension credit threshold, they must have accrued a pension fund of between £60,000 and £90,000. For most people on lower to middle incomes this is just not a reality.

As the pension credit guarantees a minimum income amount if the individual has no other savings or income, a large number of employees may feel that this is the better option than to spend years saving just to receive a credit of 60p for every £1.

Government moves to reform the pension system are certainly welcome but the changes that have been put forward seem to make little sense when considering the savings culture that the Government has been encouraging over the last few years.

The ABI has recently proposed that the state pension system could be made simpler and stronger by introducing a flat-rate and more generous second state pension. This would raise the state provision above the current minimum income guarantee, making means-testing pension credit redundant and removing a layer of great complexity.

But many agree that the road to reform through the pension credit will not be the most effective in the long-term in that it may fail to encourage a long-term savings culture. The introduction of reforms to the pension credit fails to reward or acknowledge those who have spent the last few decades adding to their own personal pension pots and planning for their future, the very things that should be encouraged.

The pension credit is forcing lower to middle-income-earners to decide whether saving for retirement is worthwhile. Who could blame them when those who have not saved throughout life are provided for by the Government?

Surely it is high time that the Government stopped sending out mixed messages and concentrated on encouraging people to save for their retirement.

Initiatives such as the pension credit do little to instil a savings culture in the UK and ignore the inroads that have been made through low-cost veh-icles such as stakeholder.

Recommended

No change in Bank of England base rate

The Monetary Policy Committee voted today to keep base rate at 3.75 per cent for another month. This was largely expected by the industry following a 0.25 per cent increase last month. Charcol senior technical manager Ray Boulger says: “Any decision other than no change would have been a major surprise &#45 we do not […]

&#39Small pension funds squeezed out of Omo&#39

An employee benefits consultant says Legal & General&#39s decision to raise its minimum fund requirement for annuity purchase from £1,000 to £5,000 could hit tax-free cash and block the open-market option. Standard Life is now the only provider to accept applications for open-market annuities for values under £5,000. Its minimum is £2,000. Jardine Lloyd Thompson […]

MGM keeps bonus steady

MGM Assurance is keeping bonus rates unchanged following its quarterly bonus rate review. The reversionary bonus rate on the bonus growth life fund will stay at 3 per cent a year and 3.5 per cent on the bonus growth pension fund. MGM reports investment returns of 2.1 per cent after tax and expenses for the […]

Providers face fines over baby bonds

Providers could be fined for mismanaging child trust funds. A draft of the Child Trust Fund Bill, included in the Queen&#39s Speech, says a provider which “fraudulently or negligently makes an incorrect statement or declaration in connection with a claim” under sections relating to Inland Revenue contributions and income and capital gains tax could face […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com