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Dazed and confused

Since the Chancellor&#39s pre-Budget statement, domestic political attention has been focused on the NHS. Almost unnoticed in his report was a new commitment to massively increase means-tested welfare spending on pensioners – by £2bn in 2004/05 and successively larger amounts in the future.

This, however, increases the complexity in an already opaque system, which has implications for individuals and advisers.

Labour has adopted a strategy of targeting assistance for pensioners through means-tested benefits. The minimum income guarantee, to be repla-ced by the pension credit, was essentially Labour&#39s new name for a more generous level of income support for pensioners.

Its key problem was that, for the individual, each pound of retirement income up to the Mig level reduced entitlement by £1. Many people with small occupational or personal pensions found they were little or no better off than if they had relied entirely on means-tested benefits.

Many pensioners felt this was unfair and the Mig clearly damaged incentives for those on lower incomes to save for their own retirement.

The pension credit is designed to put these problems right. It treats small second pensions somewhat more generously. Instead of clawing back 100 per cent of income up to the Mig level it claws back only 40 per cent up to a much higher threshold.

The credit does represent substantial new resources for poorer pensioners. But it does not really solve the fairness and incentive problems. It reduces their intensity and spreads them out over a much larger number of people.

As the Chancellor said in his pre-Budget report, around half of all pensioner households will be entitled. As he did not say, if the basic state pension continues to shrink in relation to earnings then the number of those entitled to the pension credit will grow steadily and complexity will increase.

New research published by the IPPR investigates public attitudes towards planning for retirement. We find that across age and income groups, people are dazed and confused about what they need to be doing and about the retirement they are planning for.

Pensioners feel let down by the welfare state. Older workers are panicking about how much saving they have to do.

Younger workers between 30 and 45 have little faith in the state&#39s willingness to provide for them but may still be failing to make their own arrangements.

The pension credit introduces an unwelcome element of further complication.

Since 1997, we have seen the introduction of the Mig and stakeholder pensions, and from spring next year Serps will be replaced by the new state second pension.

Just as the pension credit is fiendishly difficult to explain, so the state second pension is similarly opaque. This is not a matter of tidiness. If the pension environment is sufficiently daunting, it may dissuade people from saving in pensions at all.

If it becomes too difficult and expensive for financial advisers to provide pension advice then people will not receive that advice and its accompanying encouragement to save. Indeed, in the 1 per cent world of stakeholder it is likely to be those with the most need of advise who feel the squeeze in the growing advice gap.

Those who face the most difficult choices are low to middle income earners. The very poor are unlikely to be able to make their own provision – they do not face the problem of choosing how to save. High earners are likely to have sufficient income in retirement that they will not be affected by means-testing.

The lower earners are caught in two pincers – under current policies, they are lik-ely to be affected by the interaction of means-tested benefits and their own savings and at the same time they will not be attractive customers for the financial advisers who could potentially help them.

It is not just the detail of current pension policy that is tricky, the principles of the Government&#39s means-tested approach are not shared by the public.

IPPR&#39s new research shows that people do not see means-testing in the way the Government wants. Instead, they see the process as unfair, as taking away from those who have worked and saved rather than focusing resources on those most in need.

The same people also argue that means-testing can be unfair because such benefits miss out some people in genuine need.

The Department for Work and Pensions itself estimates that some 25 per cent of those entitled to the minimum income guarantee fail to claim it. All of these people are, by definition, below the poverty line.

Resistance to means-testing comes from all age and income groups, not just from older people with memories of the 1930s and the better off whose incomes disqualify them. People simply see a flat rate state retirement pension as fairer.

So where does this leave current policy? The intention is clearly to focus help on low earners while controlling costs to the public purse. But increasing the complexity of the system makes it more difficult for individuals to provide for themselves. The pension credit is designed to improve incentives to save but brings far more people into the means-testing net.

The long-term cost of the pension credit is likely to be high. Independent analysis by John Hawksworth of PricewaterhouseCoopers suggests that it could eventually account for a full 1 per cent of GDP, or £10bn a year in today&#39s terms.

Just as seriously, the targeted, or means-tested approach, of the Government does not chime with public attitudes so political support may be low.

Even with the pension credit, public spending on pensions is relatively low in the UK compared with other EU countries. From this perspective, pension policy appears financially sustainable for the Government.

However, the question needing to be asked is whether it is sustainable from the point of view of individuals planning for their retirement, or do we need a radical simplification in pension policy?

Richard Brooks is a researcher for the Institute for Public Policy Research

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