Righting wrongs
Some of you may have come across the following article in today’s Guardian.
It suggests Government plans for a national pension saving scheme are “flawed” and could lead to mis-selling.
The piece is both misleading and inaccurate.
In particular, I’d like to challenge the notion we’re asking people “on low incomes to pay higher rate tax (40 percent) on savings when they retire”.
It is simply untrue to describe Pension Credit as a 40 percent tax.
Under our proposed new system if a pensioner had £100 per week from their state pensions, and £20 per week from their private pension, they typically would end up with an extra £15.50 from Pension Credit.
In other words, our proposals mean the vast majority of people will be rewarded for voluntary saving.
Our proposals will restore the link between earnings and the Basic State Pension and also make it easier for people to contribute to a high quality, low-cost pension into which they are automatically enrolled on starting work.
Lower charges could mean savers get a pension pot 25 percent bigger than now.
They will also see their savings matched by combined contributions from their employer and Government.
All of which means the vast majority of people will be rewarded for voluntary saving under our proposals.
Describing our plans as “mis-selling” is simply scaremongering.
I’ll shortly be publishing more information on the blog about incentives to save under our proposed reforms.
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This entry was posted on Monday, October 9th, 2006 at 6:11 PM by James Purnell and categorized in General posts.
Tristan Cropley wrote:
Why has it taken till now for the government to do something about pensions.
Gordon brown has known about his Pensions black hole for many years.
also when i took GCSE geography 10 years ago. an age graph of Britain showed that there would be more people of retirement age in the uk than working age by 2045.
Why are 11year olds more “clued up” than the government????
Posted on 11-Oct-06 at 11:41 am | Permalink
Steve Bee wrote:
Dear James,
I suppose this won’t see the light of day on your website, but for the record the quote from the Guardian mentioned on your blog on Monday was mine and I stand by it. I was very pleased, however, to see you using a specific example to illustrate why you seem to think that I was wrong in some way in what I have said and that the Government’s view is right. Strangely enough, your own example actually proves that I am right. But it is not a matter of opinion, it is a matter of fact.
The person you chose to show how the Pension Credit system ‘rewards’ people for saving demonstrates most clearly that the saver is taxed at a rate slightly higher than 40%, just as I said.
The way the Pension Credit and Savings Credit system works is as follows:
The person in your example is entitled to £100 pw in state pensions and has saved enough in a private pension to buy an extra £20 pw income. Such a person would, as you rightly say, qualify for an extra £15.50 pw in Pension Credit (or Savings Credit, call it what you will).
But, if this person’s next door neighbour were also to be entitled to £100 pw in state pensions, but had not bothered to save anything extra in a private pension, they would be treated far more generously by your system of credits. Such a person would receive an income top-up of £14.05 pw in something called Guarantee Credit and £9.75 pw in Savings Credit. That is a total of £23.80 a week extra.
The person in your example, then, would get a total weekly pension of £135.50 (£100 + £20 + £15.50), whereas the non-saving next door neighbour would get a total weekly pension of £123.80 (£100 + £14.05 + £9.75). So, although the person in your example has taken the trouble to save enough in a pension scheme to buy himself or herself an extra £20 a week in pension the Pension Credit system will leave them just £11.70 a week better off than a non-saver. That is slightly more than a 40% tax on saving and is exactly why millions of people on modest earnings should be very wary indeed about your proposals for a National Pensions Savings Scheme.
The fact is, the current system of means-tested credits for pensioners means that what we have in effect these days is a system that taxes savers. My argument, and that of a growing number of people from within my industry, is that such a system makes it very dangerous indeed to launch a national pension scheme utilising automatic enrolment and aimed at medium to low earners. If this ever does get put on the statute books there would be a high chance that people could end up thinking they are saving for 100% of a private pension, but only getting 60% of its value. It’s splitting hairs to argue whether that’s a tax or not; the plain fact is people don’t get the full value of their pension savings and that’s not right. Put bluntly people saving a pound in a pension won’t find that it makes them at least one pound better off than non-savers, If people were to be made aware of that fact before they sign up I would guess that hardly anyone would join the scheme you propose.. And that’s the point really; this National Pension Savings Scheme really mustn’t be allowed to go through as an ‘advice-free zone’. Consumer protection must be built into the thing just as it is within our existing pension system.
Do you agree?
Steve Bee
11th October 2006
Posted on 11-Oct-06 at 3:16 pm | Permalink
Jim Thomas wrote:
I\’ve just read Steve Bee\’s response to your assertion that his piece was misleading and inaccurate. Taking your example further, he points out that if the pensioner didn\’t have a private pension then, as a result of Guarantee and Savings credits, that person would receive £123.80 per week. The person in your example would receive £135.50 per week (only £11.70 better off from a £20 per week private pension) so is, in effect, being taxed at a rate slightly higher than 40%. Would you comment on this?
Posted on 11-Oct-06 at 5:47 pm | Permalink
Stewart Wilson wrote:
On the contrary I find the article unambiguous and very accurate. The comments in the article were made by the principal leaders and thinkers of our financial services industry and to dismiss the weight of concern they voice is alarming. Under current proposals the £100 per week state pensioner with no private provision would receive approximately £124 per week, including benefits. Compare this with your example and the net advantage of building the pension income of £20 per week is £11.50 which looks very much like 40% taxation!
Posted on 12-Oct-06 at 6:02 pm | Permalink
Phil Davey wrote:
Sir, Regarding Righting Wrongs I understand that the correspondent from the Guardian\’s article, Steve Bee has responded to your comments but they do not appear on your blog. Why is that? It seems to me that Steve Bee has raised a serious issue over means tested benefits and the public needs to know if his argument stands up or not. I\’m sure a further response would help to widen the debate, as public awareness about pensions and pension reforms increases. One wonders for example, if his calculations are correct, how will members in the NPSS feel about an effective tax charge of 40% when large numbers of public sector workers are able to retire at 60 on a guaranteed final salary pension? Surely it would be better to improve the Basic State Pension to a level that takes pensioners out of means testing and give them a real incentive to save? Where will the funds come from, how about the public sector?
Posted on 12-Oct-06 at 6:14 pm | Permalink
Glyn Evans wrote:
Dear James,
I share the views of Steve Bee on this. Is it the case that individuals who are materially disadvantaged (in terms of getting full value for their pension savings) can take the government to task if they have had no advice from elsewhere, or do HM Government have immunity in this respect?
I am delighted to see you are looking to be as open as possible when it comes to hearing people’s views. Would this openness extend to publishing Steve’s message which he posted yesterday?
Regards,
Glyn
Posted on 12-Oct-06 at 8:00 pm | Permalink
Paul Hornsby wrote:
Mr Purnell
I have read your response to the article in the Guardian, and although you say that it isn’t true to describe Pension Credit as a 40% tax, in the illustration you use you cannot deny that the person who saves in the pension does not get full value for the money he has saved. He has a pension of £20 per week, but is only some £11.70 per week better off than the person who has not saved. This may not be a tax, but the effect is the same. Your comments about the amount of the inputs, whilst being true, are also irrelevent in this context - the importance of pensions is not so much as to what you put in, but the amount you get out. Having a private pension of £20 which only provides £11.70 benefit does not strike me as being good value. To effectively reform the state pension system you have to reform the Pension Credit system at the same time; a failure to do that would certainly leave you open to a charge of mis-selling.
Posted on 13-Oct-06 at 8:44 am | Permalink
Gini Bolton wrote:
Please respond to Steve Bee’s comments regarding pension savers and non pension savers. I, and many others, agree with him that you will have to end means testing before the pension credit system works and encourages people to save more.
Posted on 13-Oct-06 at 9:33 am | Permalink
Colin Caulfield wrote:
I think you\’re wrong !!
If you do the maths, comparing the effect of pension saving v no pension saving on state benefits, it can clearly be seen as a dis-incentive to save !!!!
You cannot have compulsory saving AND means testing together. Please seriously think about the consequences of your proposals.
Ps: Lower charges mean lower quality.
Posted on 13-Oct-06 at 9:45 am | Permalink
Chris Pratt wrote:
Surely you can see what the Guardian article is trying to point out. I would not take it personally - just look at the facts.
Vast numbers of the already unimpressed population would not want to save for themselves, as in your example, because they are penalised (credited with less money) for saving under their own steam.
The fact that they will not receive any of the ‘Guarantee Credit’ will mean they are not receiving as much government support as someone who has saved nothing.
Surely you can see this obvious point.
Posted on 13-Oct-06 at 9:53 am | Permalink
Derek Parry wrote:
Please explain to your readers why you do not publish the impeccably well-reasoned response sent to you by Steve Bee on 11th October.
Steve is one of the most knowledgeable people in the pensions industry. His comments are absolutely spot on. If you persist in trying to claim that black is the same as white (which is effectively what you are doing) your government will be doing a massive disservice to tens of millions of the very workers your party claims to support and protect! If you do not listen to reason, and act upon it, you will never be forgiven when the truth dawns - as you can be sure it eventually will do.
Derek Parry
Chartered Financial Planner
Posted on 13-Oct-06 at 12:10 pm | Permalink
Brian Hauxwell wrote:
To talk of pensions ‘reform’ now overlooks the cost to the community over the last few years.
National Insurance contributions have been increased by 10 percent.
Private pension funds have been robbed by the state for so many years that pension funds can ONLY be so much reduced people who have invested for 50 years in a comfortable retirement now find they have to continue work into retirement or find other means to maintain their income.
It just gives the state the opportunity to try to kid the people it is ‘helping’ them by giving them handouts from what was their own in the first place!
Yet nobody, will tell us what is that cost to the community.
I think this country was a much better place before this government ‘improved’ it.
Posted on 23-Oct-06 at 11:44 am | Permalink