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Ways and means of the pension credit

The Government has finally unveiled detailed proposals for the pension credit but what does it all mean for advisers? The first point to note is that the pension credit has been renamed in the Bill which sets forth the proposals. Now we should talk about state pension credit to avoid any possible confusion with the pension credits which arise from pension sharing on divorce.

The second point to note is that the Government remains on course to fulfil its manifesto commitment that the state pension credit will start in 2003.

The detailed proposals remove many of the question marks. We now know that the guaranteed element – the bit currently known as the minimum income guarantee – will be payable from state pension age but the savings credit element – the 60p in the pound bit – will be payable from age 65. Eventually these two ages will be the same for everyone but at the moment they are only the same for men.

The state pension credit is, of course, a means-tested benefit. The treatment of savings in the means test, which looked like it would be based on actual income, has now gone back to notional income. The notional income assumed will be 10 per cent of savings in excess of £6,000. This is half the current rate of 20 per cent. The treatment of earnings in the state pension credit has still to be determined.

Anyone claiming state pension credit will not have this counted against them in the calculation of their housing benefit or council tax benefit. IFAs who have worked with people claiming housing benefit and council tax benefit will know that they are of huge financial significance for those people. Getting full state pension credit on top is a very generous and, therefore, expensive addition.

These fleshed-out proposals constitute a generous package for today&#39s pensioners, roughly half of whom will qualify for the state pension credit because their total income is less than £135 a week for single pensioners and £200 a week for pensioner couples.

Therefore, one of the objectives of the new policy will clearly be met. This is the improvement of the lot of the less affluent of existing pensioners, especially where they have made some effort to save for retirement.

However, the other main objective of the state pension credit is to convey a clear message to moderate earners that it pays to save for retirement. In this area, it is much less clear cut that the objective will be achieved.

If someone expects to be on the state pension credit when they retire – and half the population will – they can expect to get credit in the means test for only 60p for each pound of gross contribution. The gap is narrowed when you remember the tax relief on the contribution, the element of tax-free cash and the possibility that the individual will not be a taxpayer in retirement.

But it is hardly the ringing recommendation of saving for retirement which we hoped for. Indeed, some people might argue that the more the Government raises means-tested retirement benefits, the less incentive there is to save for retirement. However, the factor which would tip the balance decisively is a significant employer contribution.

A final point to note is that the drafting of the Bill leaves open the possibility of introducing future gearing on the amount on which the 60p is based. Over time, this could be used to incentivise true discretionary savings to the exclusion of the state second pension and its contracted-out alternative, thereby allowing the 60p rate to be raised because it applies to a smaller base.

The trouble is that, unless and until the Government announces that this is its cunning plan, advisers cannot assume that the 60p rate will be raised for the discretionary savings of future pensioners.

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Legal & General – Term Savings Account – Issue 9

Tuesday, January 22, 2002. Type: High interest account. Minimum-maximum investment: £2,500-£1m. Interest rates: £2,500-£4,999 4.5 per cent gross a year, £5,000-£9,999 4.6 per cent gross a year, £10,000 plus 4.7 per cent gross a year. Term: 12 months. Offer period: Until further notice. Withdrawal penalties: No withdrawals permitted during term. Tel: 0870 5600608.

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