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Mr. Chris Pond (Gravesham): On future savings and pensions, I wonder whether the hon. Gentleman can offer some independent financial advice to my nine-year-old daughter. In the event that there were to be a Conservative Secretary of State for Work and Pensions by the time she reached retirement age, and given the hon. Gentleman's current policy of replacing state provision with private provision, how much does he recommend that she start saving weekly now to ensure at least the equivalent of today's basic state pension by the time she reaches retirement age?

Mr. Willetts: The hon. Gentleman is straying into dangerous territory. He will know that one of the main groups of people taking out the stakeholder pension—which was supposed to tackle pensioner poverty—

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is grandparents, who buy them for their nine-year-old grandchildren, for example. If he regards that as a serious contribution to the improvement of pensioner poverty, I suggest that he study the subject in rather more detail.

The question whether the pension credit will reward pensioners who have saved is a subject on which the IFS is unsure, and on which the Financial Services Authority has given a clear warning. In the context of stakeholders—the point is relevant to pension credit as a whole—the FSA says:

The hon. Member for Gravesham (Mr. Pond) is interested in encouraging us to give such advice, but we are not registered to do so. The FSA continues:

The FSA is warning that, because of the complexity of the pension credit's impact, it cannot be sure that people will be better off buying a stakeholder pension, and recommends that they seek advice. The IFS and the FSA offer the same warning: that matters are not necessarily as straightforward as Ministers like to claim, and that the pension credit will not necessarily provide all pensioners with an unambiguous incentive to save more.

Mr. Levitt: If a pensioner has an income from investments or an occupational pension, it will surely be sufficiently high to take them above the pension credit level. If not, the pension credit will supplement that income. In both cases, there will be an incentive to save, and those whose income is below the pension credit level would also have an incentive, because they will qualify for extra help on reaching that level. Who has the disincentive?

Mr. Willetts: The subject is not as simple as that, which is why the FSA is warning people to take advice. We hear about the 40 per cent. rate of pension credit withdrawal—the higher rate tax level—but once housing benefit and council tax benefit are included, pensioners could face marginal rates of up to 91 per cent. People might well think that a 91 per cent. rate of benefit withdrawal does not offer much of a reward for saving. Labour Members need to contemplate the impact of those measures, which would extend such marginal rates up the income scale.

Miss Anne Begg (Aberdeen, South): When the hon. Gentleman began his working life, did he decide that it would probably be in his best interests to save for his retirement, not knowing that he would reach the heady heights of Government office, earn lots of money and thereby be able to save? Like most of us, he probably decided at that early stage that it was probably sensible to save, not knowing whether he would be able to continue to do so, or to save as much as he anticipated. Most people in that situation would decide that it was better in the long term to save—either because they will be able to save a great deal for their retirement, or because they will be able to save a bit and therefore benefit from the pension credit.

Mr. Willetts: Again, I wish that matters were as simple as that. The savings gap—the gap between the amount

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people are actually saving and the amount that they need to save to enjoy a reasonable income on retirement—is estimated at a massive £27 billion a year. That is the problem that we have been debating—with the notable exception of the Secretary of State, who has remained silent as occupational pensions for new members have closed. We pressed Ministers on this issue for years, on the introduction of the stakeholder pension. For example, we asked how much money one needs to build up in a stakeholder fund to be confident that it will yield an income sufficient to get above the minimum income guarantee. That straightforward question—it is the $64,000 question—is one of the first that any independent financial adviser would want to consider, but we have never received a straight answer from Ministers.

The answer could be $64,000. It could be even more. If means-testing spreads further up the income scale, it will affect the behaviour of the next generation. It is no good arguing that nobody will be affected and that people will carry on as if nothing has happened. Ministers cannot claim that this is a massive change in the way in which pensioners are helped without also recognising that it might have an effect—not always a desirable one—on the behaviour of the next generation of pensioners. That is what I ask Labour Members to consider.

Mr. Jim Cousins (Newcastle upon Tyne, Central): If the hon. Gentleman wishes to sweep away all the complexities and rely on the basic state pension, what relationship does he think that that pension should bear to average earnings, now and in the future?

Mr. Willetts: Let me turn to that issue, because I now wish to set out a possible alternative approach. We would begin by acknowledging the most powerful point that the Secretary of State makes, although he did not put it especially succinctly today. He says that in the old days the basic state pension was well targeted on poverty because most pensioners were poor. However, he argues that pensioners now have a greater diversity of incomes, so the basic state pension is less well targeted on poverty. That is the kernel of the argument that the Secretary of State uses against those of his colleagues who wish to restore the earnings link and in favour of means tests. That point reflects the reality of greater diversity of income among pensioners and it is the challenge to us to think afresh about the problem.

Beveridge's great insight was that if one could define categories of benefit recipient carefully enough, measures could be well targeted on poverty without means-testing. In his day, the basic state pension was well targeted, but now it is less so. The Secretary of State says that means-testing is the only alternative, but we know that, by and large, older pensioners tend to be poorer pensioners. The correlation is not perfect, I accept, but it is broadly true. The figures are striking. Couples who have recently retired have, on average, an income of £384, compared with the under-75s on £359 and the over-75s on £283. Similar figures apply to single pensioners—those who have recently retired are on £210; those aged under 75 are on £184 and those over 75 on £158.

The hon. Member for Northavon (Mr. Webb)—my new friend, as the Secretary of State described him—made the fair point, sotto voce, that those figures are the reason

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why the Government introduced free television licences and restricted them to the over-75s. The Government argue that that provision was well targeted because older pensioners tend to be poorer. The reasoned amendment does not propose a precise age range, because that would need to be decided, but if we paid a higher rate—not to all pensioners, as the Secretary of State claimed, but to older pensioners—it would be reasonably well targeted on poverty without more means-testing.

Despite the imperfections in that scheme, which I freely admit, we could at least be confident that all pensioners would receive the payment. I am not confident that all pensioners will get the pension credit. The Government cite a load of figures for the pension credit, but they all assume a 100 per cent. take-up. That is a bogus assumption.

Mr. Cousins: That is interesting, but I am still waiting for an answer to my question. What should be the relationship between the basic state pension—if the hon. Gentleman wants to rely on that as a means of delivery—and average earnings? Should it be 25 per cent., 10 per cent., or perhaps 4 per cent.? That is what we need to know.

Mr. Willetts: I do not propose that we bring back the earnings link. I propose a significant increase in the basic state pension when people reach an age at which we know they are likely to have a lower income. That is what Members on both sides of the House propose as a better way to tackle the problem than yet more means-testing, and it has much to recommend it.

Mr. Dismore: Will the hon. Gentleman give way?

Mr. Willetts: No, I wish to make some progress. There is a logic to the reasoned amendment and I invite the House to consider that alternative strategy. I hope that it will win the day in the Division at 10 o'clock. However, if the pension credit is implemented despite our concerns, I would not take it away from pensioners—

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