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Pension credit warning as FSA points to savings alternatives

The FSA has warned that the Government&#39s pension credit is a disincentive to saving and has suggested that some people would be better off not saving for retirement through a pension.

The Government is implementing the pension credit in April 2003 with the aim of rewarding savers for their thrift with the message: “It always pays to save.”

But the proposals have come under fire from pension experts who say that, for some, the credit means their savings are taxed at up to 40 per cent.

In its Financing the Future report, published this week, the FSA says the tax and benefit system can “blur incentives to saving for retirement”.

The FSA believes the “imp-lied 40 per cent deduction rate will inevitably be a disincentive to save for some now at work”. It estimates that 40 per cent of all pensioners could be in line for the pension credit at retirement.

It says: &#39For people at work, it is clear that their prospective retirement income is likely to lie in the relevant range, there is certainly a case for considering saving through an alternative tax-efficient savings vehicle rather than a pension contract.”

But pension experts have warned that such lump-sum investments, which provide capital rather than an income, will not automatically avoid means-testing.

Scottish Life head of communications Alasdair Buchanan says: “The pensions credit is a disincentive to save but other savings vehicles such as Isas are not the answer because there is a limit after which your capital is also means tested. A more straightforward option would be to let people unwind their pension if they find they will lose out.”

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