With the Pension Bill receiving its second reading in Parliament, the Government is promising that the measures it has proposed will lead to many more people qualifying for a full, basic state pension and being better off in retirement.
In addition to a “more generous” and “fairer” state pension, the Government says the plans laid out in the bill will provide a solid foundation that people can use to build up a private pension.
Introducing the second reading of the bill, Secretary of State for Work and Pensions John Hutton said: “This bill would create a more generous, fairer state system that would become a bedrock on which people can build up decent private provision.”
The Government is part-icularly keen to highlight the potential benefit to women and carers, saying that 75 per cent of women would be entitled to the basic state pension by 2010, instead of only 50 per cent if the system is unreformed.
Despite pledges to re-link the basic state pension to earnings, the Government has still not tackled the issue of means-testing.
According to Government figures, 30 per cent of pensio-ners will qualify for means-tested benefits by 2050.
Hutton said: “We think means-testing could be significantly reduced. If we do nothing now, it will reach about 75 per cent of pensioners by 2050. With these reforms we can get the figure down to about 30 per cent.”
However, the pension thinktank, Pensions Policy Institute, says this is the lowest estimate possible and that under the Government’s plans anywhere between one third and two thirds of pensioner households will be eligible to claim means-tested benefits by 2050. This could be as many as six million people.
Speaking at last week’s second reading of the Pensions Bill, Conservative Shadow for Work and Pensions Philip Hammond said: “The Department for Work and Pensions and the Secretary of State have said today that means-testing will be limited to less than 30 per cent of the pensioner population by 2050. However, the Pensions Policy Institute, a respected independent thinktank, believes that 45 to 50 per cent of pensioners could be affected.”
This is not as many as the 75 per cent of pensioners who would be affected by means-testing if the current system is not reformed but it leads to a very difficult question for advisers when looking at borderline cases considering saving for retirement.
Winterthur Life pensions strategy manager Mike Morrison says: “The Government has to be called to account over the question of if someone has saved, then, surely, they should be better off than someone who has never saved?”
Savers and advisers need to know that they will not lose 60 per cent of their savings to means-testing.
Morrison says: “It is all very well when the Government says more people will benefit but can we get an insertion that says people will be better off?”
The people most at risk from lost entitlement are those with the least inclination and the least access to advice. Morrison says people at the lower end of the market are not really the people who go to see IFAs, and there is little financial incentive for IFAs to cultivate this market. There is a risk that people who need advice will miss out. “The people who need financial advice will effectively be disenfran-chised,” he says.
The Government taskforce, set up by Ed Balls this month to look at the provision of generic financial advice, could help some people avoid the trap of means-testing but there are fears that it will not go far enough.
Standard Life pensions technical manager John Lawson says generic advice may be able to fill part of the gap but the amount of money that the Government is proposing is too low.
Lawson says: “The aim of generic advice is laudable but the budget is ridiculously low. I think it works out at about £6 per person. At that rate, you would have to save for 80 years for a consultation with an IFA.”
The Liberal Democrats are also warning that the issue of means-testing will undermine any attempts to introduce the new system of personal pension accounts.
Shadow work and pension spokesman David Laws says people effectively run the risk of being missold a personal account by the Government if the levels of means-testing is not reduced.
Laws says: “This Pension Bill must provide a solid foundation for personal accounts through reduced means-testing. The money many people save could simply be lost in reduced entitlement to benefits.”
Lawson says generic advice can play a part in ensuring that people who are going to be worse off if they are enrolled into the NPSS or personal accounts system are warned, as there are categories of people who will almost certainly be worse off by joining such a scheme.
“People with chronic debt for example. And anyone above the age of 50 who rents, regardless of what they earn, would be better off not saving, as it will not benefit them,” says Lawson.