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Means-testing looks set to be scrapped for low earners

Former DWP minister Baroness Hollis has added an amendment to the Pensions Bill which could remove means-testing for low earners if it is passed in the House of Lords.

This would represent a big departure from the Government’s stance on means-testing for benefit entitlement which previously would have been calculated on the basis of the amount of savings an individual had including those saved into personal accounts when they are introduced in 2012.

If the amendment is passed, an individual’s savings will be disregarded when calculating benefit entitlement which will benefit low earners.

Under current legislation, if an individual has less than £16,000 or 1 per cent of the lifetime allowance in all of their pensions, they can be taken as a lump sum and 25 per cent will be tax free, with the remaining amount taxed as income.

Standard Life marketing technical manager Andrew Tully says: “If this goes ahead, it represents a seismic change in the Government’s stance on personal accounts and means-testing. Only those saving in a personal account who accumulate more than 1 per cent of the lifetime allowance, currently £16,000, will have to worry about the pensions credit means-test.

“For example, those over 55 when personal accounts are introduced in 2012 are unlikely to accumulate more than 1 per cent of the lifetime allowance unless they have an existing pension. The change makes saving in a pension more attractive than saving in an ISA or other savings account. However, individuals would need to take care to ensure their pension pots never exceeded 1 per cent of the lifetime allowance.”

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England vs Australia: pensions

Well, the cricket season is here, and England and Australia are stepping up to the wicket. Although we compete with each other in the sporting world, when it comes to pensions, Australia’s pension programme is held up as a model for our auto-enrolment initiative. Auto-enrolment was introduced because people weren’t saving enough into their pensions, and it is still early days but signs are positive. However, in Australia, saving into a pension is compulsory, and in fact employers are the ones who have to pay in. Employees in Australia can make additional contributions into their pensions, but they don’t have to. Should the onus be on the employer or employee to save? Well in the UK we think it’s both, but to get ‘adequate’ savings for retirement it’s the employee who has to pay more in.

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