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The savings trap

Personal accounts are aimed at ensuring that more people enjoy a comfortable retirement but the current mechanics of how means-tested benefits might interplay with the proposed scheme threaten to leave many worse off.

The Pensions Policy Institute and pension providers have highlighted the risk that some people could see low returns on their saving efforts if they are auto-enrolled into personal accounts, which are scheduled to be introduced in 2012.

The biggest risk is that some savers may accumulate just enough cash to lift themselves out of means-tested benefits but no higher and, if they would have otherwise received these benefits, they would have been better off bolstering their standard of living during their working life.

Those at risk of being caught in the savings trap include those likely to be on more than one benefit when they are older, such as low-earning pensioners living in rented accommodation and entitled to housing benefit.

Also at risk are low-earners in their 40s and 50s who are yet to start saving. Those with short or broken employment histories are also likely to do worse if they build modest savings within a personal account than if they simply relied on the state to provide.

Those with short or broken employment histories include people in jobs that are seasonal or involve shorter working lives, such as construction jobs. Significantly, this category also includes the self-employed and women who take career breaks to care for children and others.

PPI research director Chris Curry says: “The fact there will be auto-enrolment and a number of groups are at risk of not receiving perceived good value makes this a huge social policy issue.”

Auto-enrolled workers will have the option to opt out but, before doing so, at the very least they will need generic advice on whether they would be better or worse off remaining opted in.

Experts fear that advice gaps and uncertainty over whether it really will pay to save could seriously undermine the success of personal accounts in aiming to encourage more low-earners to save for their retirement.

B&CE Benefit Schemes deputy chief executive John Jory says: “If we want to encourage people on lower to moderate incomes to save for retirement, then we must be able to assure them that they will be demonstrably better off for doing so. Current means-testing benefits do not give this reassurance. We know that for many people, pension saving is not a priority so we must ensure that all possible disincentives are properly addressed.”

If personal accounts do not offer good value to lower-earners, it would be rational for them not to save, defeating a core objective of personal accounts.

Standard Life head of pensions policy John Lawson says: “You can imagine that it will only take either The Sun or the Daily Mirror to carry one story suggesting that people have to be careful of personal accounts to lead everyone to thinking they are dangerous. That could be enough to hole personal accounts under the waterline.”

Curry says: “If people cannot tell whether or not they would be better off saving, it might act as a huge barrier to saving.”

Personal Accounts Delivery Authority chairman Paul Myners has admitted that some people with savings in personal accounts will be worse off when they retire due to the negative impact of means-testing and that there will always be people for whom auto-enrolment will not be the right option.

At the National Association of Pension Funds annual conference, Myners drew parallels with the dangers of using seatbelts in cars, saying there are a comparatively small number of people whose injuries are increased or who die because of seatbelts compared with the vast majority of car users whose potential injuries or chances of death are greatly reduced by using seatbelts.

In other words, the risks outweigh the benefits with seat belts and the same goes for personal accounts.

Lawson is among those unhappy in extending this logic to personal accounts. “We could be talking about around two million people here. This is not the sort of thing that we in the pension industry should be letting slip by unnoticed,” he says.

The Government has recognised the magnitude of the means-testing and personal accounts issue and is conducting its pension savings incentives work programme. So far, a number of mechanisms aimed at tackling the means-testing issue have been mooted and the PPI has analysed two policy options aimed at improving returns for those groups at risk.

One measure allows more people with small pension pots to take their saving as a lump sum, rather than as an annuity, in a bid to boost returns against the means-testing backdrop.

Another measure would mean a limited amount of private pension income – £12 is the amount suggested – is ignored when calculating entitlement to means-tested benefits. This might be known as pension income disregard.

The PPI says both options would increase Government spending in 2012 by about £500m, or around 4 per cent of total Government expenditure on pensioner means-tested benefits.

Curry says: “All the options that are being discussed involve their own trade-offs and part of the decision-making process will be about what the most important factors are.”

While pension experts and the Government work through the pros and cons of various proposals, people at risk of losing out in the confusion will require guidance on what their best course of action is now.

Aifa says it accepts that it may not be profitable for many IFAs to provide advice to employees on personal accounts but it is important that employees receive adequate information or, where possible, individual advice. This could be achieved through pro bono work of IFAs or paid for by employees or employers.

Legal & General senior manager wealth policy John Gleadall says: “The risks need to be pointed out to people and that information needs to be delivered in a way they will understand and that will not put them off saving.”

Some in those groups at higher risk of losing out might look to trade unions or membership organisations.

B&CE’s Jory says: “We would feel that we have an obligation to our members to encourage higher contributions to ensure it pays for them to save but also advise people what is at stake otherwise. The last thing we want to do, though, is put doubt in people’s minds which might encourage too many of them to take the easy option and not save at all.”

Some experts, including Royal London executive director John Deane and Standard Life’s Lawson, say that unless the means-testing issue is resolved, it threatens to undermine Otto Thoresen’s proposed plans for a national money guidance service. This service could help people with budgeting and saving for retirement but if the interplay between benefits and private provision is not dealt with, then the effectiveness of a money guidance service could be called into question. The Government is carrying out its research and is expected to publish the results by the end of this year.

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