Select Committee on Work and Pensions Minutes of Evidence


Memorandum submitted by the Department for Work and Pensions (PC 25)

SUMMARY

  1.  In November 2000 the Government published proposals to introduce the Pension Credit. Following consultation, details of how the Pension Credit will work were set out in the booklet The Pension Credit: the Government's proposals published on 28 November 2001 to coincide with the introduction of the State Pension Credit Bill into Parliament.

  2.  The overall aim is to tackle poverty amongst today's pensioners and boost the incentive for future pensioners to save for their retirement—for the first time pensioners who have saved even modest amounts will gain from having done so.

  3.  The Government inherited a pension system that was failing to provide enough support to today's pensioners and failing to provide security in retirement for future pensioners. In 1998, the Government set out its proposals to address these problems in the Pensions Green Paper, A new contract for welfare: partnership in pensions (December 1998, Cm 4179). In the Green Paper, the Government set out a new framework for reforming both state and private pensions, with the aim of ensuring that everyone could enjoy a decent income in retirement.

  4.  The Government's first priority was to address the immediate problem of pensioner poverty today by introducing the Minimum Income Guarantee along with a range of other measures, such as Winter Fuel Payments and free TV licences for the over 75s.

  5.  Secondly, the Government has introduced long-term reforms designed to help more of tomorrow's pensioners build up better pensions. 18 million people—two million carers, two million long-term disabled people and 14 million low to moderate earners—will benefit from the introduction of the State Second Pension from April and the new stakeholder pensions will help more people to save for their retirement.

  6.  The Pension Credit is the next crucial next stage of a comprehensive Government strategy for older people designed to:

    —  reform pension provision (both state and private) to ensure that the pension system of the future can provide security in retirement to all; and

    —  reform support for today's pensioners to ensure that help is targeted on those who need it most—pensioners on low and modest incomes.

  7.  The Government will also reform the way services are delivered to pensioners to provide a modern and efficient service that deals with all pension and benefit issues in a way that is tailored to pensioners' needs.

  8.  Around half of all pensioner households will be eligible for the Pension Credit—5.3 million individual pensioners or 4.1 million pensioner households stand to gain. On average, eligible pensioners will gain just over £400 a year. This is the average gain from the savings credit and changes to the income assessment (like the new capital rules) and includes the average gain in Housing Benefit/Council Tax Benefit as well as Pension Credit.

  9.  The total cost of the Pension Credit and changes to Housing Benefit and Council Tax Benefit will be £2 billion in 2004-05. In respect of the longer term, the Government published illustrative projections in "The Pension Credit: Long—Term Projections" (ref: DWP-PCP-2) on 17 January.

  10.  The Pension Credit, along with the introduction of the new Pension Service, will address a number of failings in the current system of support noted in The Seventh Report of the Select Committee on Social Security (Pensioner Poverty):

    —  The need to boost the incentive for future pensioners to save at the same time as tackling poverty amongst today's pensioners—the Pension Credit will work in two ways. First, it will bring pensioners' income up to a guaranteed minimum entitlement. Second, it will make sure that it pays to have saved.

    —  Saving is not rewarded—millions of pensioners living on low or moderate incomes, and who had saved something for their retirement, found that they were little or no better off than people who had saved nothing—the Pension Credit will reward thrift and effort in providing for retirement to ensure it pays to have saved even quite modest amounts.

    —  The system the Government inherited can be complicated, pensioners do not like it. The Government wants to improve the co-ordination of services for pensioners, making it easier for them to get their entitlements and to better tailor the services they use to meet their needs. The Pension Service will play a crucial role in encouraging pensioners to claim their entitlements. New rules for Pension Credit will mean, for the most part, that changes in circumstances will only have to be reported every five years.

  11.  The Pension Credit will be of particular help to women and older pensioners—two groups about whom the Select Committee expressed particular concern. Of the 4.1 million pensioner households who will be entitled to Pension Credit in 2003-04:

    —  over a quarter (28.5 per cent) will be age 80 and over;

    —  just over half (53 per cent) will be single women; and

    —  around 30 per cent will be women and men in a couple.

  Also, half the women entitled to the Pension Credit will be aged 75 or over.

  12.  As a result of the Government's tax and benefit reforms already introduced, pensioner families will on average be better off by over £16 a week (around £840 a year) in real terms by April 2002 compared with 1997. When the Pension Credit is introduced in addition to these policies, single pensioners will find themselves on average more than £23 a week better off in real terms and couples will be on average more than £32 a week better off than in 1997.

INTRODUCTION

  1.  This memorandum has been prepared for the Work and Pensions Select Committee for their inquiry into the Government's proposals for the Pension Credit. It provides the Committee with the information requested in their letter of 6 December 2001.

WHAT IS PENSION CREDIT?

  2.  The Pension Credit introduces a major change to the welfare system which addresses the long-standing complaint that the existing social security system penalises pensioners with modest occupational pension or savings. Under the present rules, a pensioner with income from savings or a second pension that takes them just above the Minimum Income Guarantee level can find they are no better off than pensioners who saved nothing during their working lives. The Pension Credit will ensure that pensioners who have saved for their retirement will gain from having done so.

  3.  The Pension Credit will replace the Minimum Income Guarantee for people aged 60 and over from October 2003. It comprises two elements:

    —  A guarantee credit to ensure a minimum income for those aged 60 and over.

    —  A savings credit which will, from age 65, provide an additional income for pensioners who have low or modest incomes in addition to the basic state pension.

  The minimum qualifying age for the guarantee credit will, like state pension age for women, rise by stages to 65 between 2010 and 2020.

The guarantee credit

  4.  The guarantee credit will provide the minimum income level, below which pensioner income should not fall.

    —  The guarantee will top up the pensioner's own weekly income to the minimum level. On introduction in 2003: £100 a week or £154 for a couple (illustrative figures, at 2003 prices).

    —  There will be a higher guaranteed income for those who are severely disabled, for carers and owner-occupiers with housing costs.

    —  The level will rise in line with earnings during this Parliament.

  5.  Within Pension Credit there will be new rules for the treatment of savings. The rule that excludes pensioners with £12,000 or more will be abolished. Savings of less than £6,000 will be ignored entirely. For savings above £6,000 a notional rate of income will be taken into account, set at around 10 per cent. That is half the current assumed rate of income in MIG (20 per cent) and, together with the introduction of the savings credit, the new system treats capital five times more generously. For instance, this means that for somebody who saves, say £10,000 the current MIG rules assume an income of £16 a week on those savings whereas, under Pension Credit, only £8 a week would be assumed from the same savings.

  However, as the majority of pensioners who will be eligible for Pension Credit have savings below £6,000, it is estimated that 85 per cent of pensioners getting the Credit will see any income they receive from savings ignored entirely.

The savings credit

  6.  The savings credit will reward pensioners who have built up a second pension, or other savings such as post office, bank or building society accounts.

    —  The savings credit will give pensioners 60 pence for every £1 of net income they have from second pensions, savings and so on above the level of the Basic State Pension up to a maximum.

    —  The savings credit can give pensioners up to a maximum of £13.80 a week for single pensioners and £18.60 a week for couples.

    —  Pensioners above the guarantee level will qualify if their incomes are up to about £135 a week for single pensioners (£200 a week for couples). Some, including severely disabled people and carers, will be able to qualify if their incomes are above this level.

Housing Benefit and Council Tax Benefit

  7.  Any pensioner who receives the guarantee credit will be entitled to full Housing Benefit and Council Tax Benefit. Nobody will lose Housing Benefit or Council Tax Benefit as a result of the Pension Credit. The Government will achieve this by raising the level at which pensioners qualify for help in line with the Pension Credit, and also by mirroring the new rules on savings. This will ensure that pensioners who benefit from the savings credit do not see their gains clawed back through a reduction in their Housing Benefit or Council Tax Benefit. The current cut-off point of £16,000 savings for pensioners who do not qualify for the guarantee credit will, however, be retained.

  8.  Around half of all pensioner households will be eligible for the Pension Credit—5.3 million individual pensioners or 4.1 million pensioner households stand to gain. On average, eligible pensioners will gain just over £400 a year. This is the average gain from the savings credit and changes to the income assessment (like the new capital rules) and includes the average gain in Housing Benefit/Council Tax Benefit as well as the Pension Credit.

THE ROLE OF PENSION CREDIT IN THE GOVERNMENT'S OVERALL PENSION STRATEGY

  9.  The Government inherited a pension system that was failing to provide enough support to today's pensioners and failing to provide security in retirement for future pensioners. In 1998, the Government set out its proposals to address these problems in the Pensions Green Paper, A new contract for welfare: partnership in pensions (December 1998, Cm 4179). In the Green Paper, the Government set out a new framework for reforming both state and private pensions.

  10.  The Basic State Pension is, and will remain, the foundation for income in retirement. However, it has always been the case—right from the early days of state pensions—that people were expected to build up a second pension or other savings, on top of their basic pension. Indeed, it is the fact that more people are retiring with good company or other personal pensions that explains why pensioner incomes have risen faster than the incomes of people in work over the last 20 years. The task now is to encourage more people to save, and to make sure that it pays to save.

  11.  The Government's reforms are based on the principle that those who can afford to save have a responsibility to do so. In return, the Government should support those who cannot afford to save and ensure the pension and wider savings system meets the needs of savers.

The first stage

  12.  The Government's first priority was to address the immediate problem of pensioner poverty today. The Government introduced the Minimum Income Guarantee (MIG)—along with other measures—to provide more money for the poorest pensioners as quickly as possible. Nearly 2 million pensioners are already receiving MIG. The introduction of the MIG has meant that the poorest pensioners are getting over £400 more a year (or over £8 per week). The Government has made it easier for pensioners to claim the MIG, by reducing the 40-page claim form to just 10 pages, and by introducing a new telephone claims service. Also, from October 2001, callers to the Retirement Pension Teleclaims Centre not already receiving MIG are asked a series of questions to identify potential entitlement. Those people who claim Retirement Pension by post are sent a leaflet which gives a clear explanation of MIG and who can claim.

  13.  The Government introduced measures to ensure that all pensioners share in rising prosperity. From April 2002 the Basic State Pension will rise by £3 a week for single pensioners and by £4.80 for couples, on top of above-inflation increases last year. This is in addition to the introduction of Winter Fuel Payments, and free TV licences for the over 75s.

  14.  The Government has also announced that the Basic State Pension will rise by at least £100 a year for single pensioners, and by at least £160 a year for couples, in April 2003. In subsequent years, it will rise by either 2.5 per cent or by inflation, whichever is highest.

  15.  From April 2002, the Government will be spending an extra £6 billion a year in real terms on pensioners as a result of policies introduced since 1997. This includes £2.5 billion more on the poorest third of pensioners.

The second stage

  16.  The second stage of the Government's strategy was to put in place the long-term reforms that will help prevent poverty arising in the future as well as to enable more people to save for their retirement. For future pensioners, the Government is improving the choices available to people who can afford to save, and it is providing more support for those who cannot afford to save. There is a two-pronged approach:

    —  For people on low incomes, funded pensions are generally poor value and they would be better off in state provision. SERPS is being reformed with the introduction of the State Second Pension from April 2002. As the scheme matures it will provide dramatically better provision for around 18 million people, in particular for those who are unable to work because they are caring for others, or they are disabled. Under these reforms, low earners will get at least double what they would have received from SERPS.

    —  People on moderate and higher incomes are generally better off saving in a funded pension. The new stakeholder pensions have increased the choice available to people on moderate and higher incomes. Stakeholder pensions offer a new, low cost option, for people without access to a company pension scheme, as well as allowing people who are not earning to save for their retirement (for example, non-working partners who may be taking time out of the labour market to care for children).

  17.  Stakeholder pensions also have a wider beneficial impact on pensions (the "halo" effect). Some employers have widened access to their occupational pension scheme to the whole of their work force, some employers have set up a group personal pension with an employer contribution, and other private pension schemes have reduced their charges in order to compete with stakeholder pensions' capped management charges (1 per cent of fund a year).

Income Tax

  18. The Government has announced its intention to increase the personal tax allowances for pensioners, so that those on higher incomes would also see greater gains from their savings. Most pensioners have no Income Tax to pay. But for those who do, the age-related personal allowances will be raised at least in line with earnings rather then prices from 2003-04 and for the remainder of the Parliament.

The third stage—the Pension Credit

  19.  The third—and crucial—stage of the Government's reforms is the introduction of the Pension Credit which aims to:

    —  boost the incentive for future pensioners to save for their own retirement; and

    —  tackle poverty amongst today's pensioners (a detailed discussion is at Annex A).

Gainers

  20.  In total, around half of all pensioners stand to gain from these changes:

    —  1.2 million pensioners stand to gain from the improvements to the guarantee credit;

    —  4.1 million pensioners stand to gain from the savings credit and the improvements to the rules on the treatment of savings; and

    —  3.5 million pensioners stand to gain from increased pensioner tax allowances (some of these will also benefit from the Pension Credit).

INCENTIVES TO SAVE FOR RETIREMENT AND IMPLICATIONS FOR THE PENSIONS AND INSURANCE INDUSTRIES

  21.  There is inevitably a tension between the need to ensure that there is a floor below which pensioner incomes do not fall and the need to ensure that today's workers have a clear incentive to save. Right from the start of National Insurance in this country, it has been the case that on top of the Basic State Pension, there has been extra help for those on lower incomes. Since 1997, the Government has substantially increased the extra help available to pensioners on lower incomes through the introduction of the Minimum Income Guarantee (MIG). However, whilst this has raised the incomes today of around two million of the poorest pensioners, it could not resolve the problem of making sure that working age people are encouraged to save and know that they will be rewarded for doing so, thus helping to prevent poverty in the future.

  22.  Under rules that have existed since the war, pensioners with incomes from saving can be no better off than if they had chosen not to save because benefits are withdrawn pound for pound on any extra income. This undermines incentives for people to save during their working lives, if they are likely to qualify for the Minimum Income Guarantee when they retire. In contrast, under the Pension Credit individuals will see a 60p increase in their income for every pound saved above the Basic State Pension level up to a maximum. It will, therefore, pay to save.

  23.  The design of the Pension Credit capital rules will further promote saving. The Government is abolishing the current rule which excludes pensioners with £12,000 or more in savings from any help. For savings below £6,000 income will be ignored. For savings above £6,000 a notional rate of income will be assumed, set at around 10 per cent. Setting the assumed rate of return above actual rates recognises the fact that capital remains intact with an ISA whilst a pension annuity progressively draws down the "pot" available at the point of retirement. But the Pension Credit assumed rate of savings from income will be half the current assumed rate of income in MIG (20 per cent) and, together with the introduction of the savings credit, the new system treats capital five times more generously. For instance, this means that for somebody who saves, say £10,000 the current MIG rules assume an income of £16 a week on those savings whereas, under Pension Credit, only £8 a week would be assumed from the same savings.

  24.  There are also tax advantages to saving in a pension. Tax-free contributions plus, in particular, the tax-free lump sum, together with the tax-free build up of investment returns, create a powerful incentive to save for retirement.

  25.  Availability of information helps people on low and modest incomes to about saving for their retirement. The Financial Services Authority is presently consulting on updating their decision trees. The Department for Work and Pensions will contribute to the consultation. With the introduction of Pension Credit it will be possible to make a reasonably positive statement that for most such people, most of the time, they would be better off saving for retirement through a pension. The structure of charges in stakeholder pensions means that they will not be penalised even if they can only afford to contribute small amounts, while the savings credit element of Pension Credit means they will generally be better off in retirement than they would otherwise have been.

  26.  Similarly, the introduction of the Pension Credit makes the job of the savings industry easier. Financial advisors will in most cases be able to give straightforward advice—if you want a higher living standard in retirement you should contribute to a pension.

  27.  The Government attaches great importance to providing better information to help people make informed decisions about saving for their retirement. The Department for Work and Pensions are working in partnership with employers and pension providers to introduce new pension forecasts giving both state and private pension details. For the first time individuals will have a clear statement of their current and projected pension rights.

  28.  Where possible statements will be provided through employers and pension providers, who are best placed to provide the additional information individuals need on company or private pensions options. The aim is to reach the 18.5 million members of private pension schemes in the working population who could benefit from a combined pension statement. The Government also aims to give the 1.5 million people who are not currently members of their occupational scheme a state pension forecast through their employer.

PROPOSED METHODS OF CLAIMING AND ASSESSING ENTITLEMENT, INCLUDING FREQUENCY OF REASSESSMENT

  29.  The Government wants to make it much easier for pensioners to claim all their entitlements. In the past, the system has been seen as intrusive and bureaucratic—pensioners have been put off claiming help they are entitled to by having to complete long complicated forms. Also, in theory, pensioners can be required to report information on a weekly basis, when in fact for most pensioners, particularly the older ones, their incomes tend to be stable. The Government has now made it easier for pensioners to claim the MIG, by reducing the 40-page claim form to just 10 pages, and by introducing a new telephone claims service. The introduction of Pension Credit will continue to build on this. Pensioners will be able to provide details over the phone to enable The Pension Service to calculate their Pension Credit in addition to putting their Basic State Pension into payment. New rules for Pension Credit will mean for the most part that changes only have to be reported every five years. The Pension Service, to be launched from April 2002, will improve the co-ordination of services for pensioners and will play a crucial role in encouraging pensioners to claim their entitlements.

Applying for the Pension Credit

  30.  The Pension Service will contact people shortly before they reach state pension age to invite them to claim their state pension entitlement, including their Basic State Pension and their Pension Credit. They will be able to apply in writing or by telephone. Many pensioners have said that they prefer using the telephone. In the longer-term people will be able to apply electronically, over the Internet. Pensioners will be able to provide their details over the phone, for the most cases, pensioners will only need to answer the questions that apply to their particular circumstances. They will then be sent a statement of the details given and they will be asked to confirm these are correct.

Assessing and reassessing entitlement

  31.  Once the details have been confirmed, the pensioner will be sent a letter setting out how their Pension Credit entitlement has been calculated and explaining what to do if they think this is not correct. The letter will also explain what changes the pensioner should tell The Pension Service about—in the main these changes will be no more than those that pensioners have to report for Basic State Pension purposes—change of address, getting married or divorced, going into hospital. Otherwise, people 65 and over will not normally have to report any changes for five years at a time. However, if their income drops they will be able to ask for their Pension Credit to be increased.

  32.  During the five-year period, The Pension Service will automatically recalculate the Pension Credit due at each annual uprating and will take account of changes in any second pension the pensioner has. Towards the end of the five years, The Pension Service will write to the pensioner setting out the facts on which their Pension Credit is based and asking if there has been any change. The Pension Credit entitlement will be checked and recalculated if necessary. The Pension Service will then write to the pensioner explaining the amount they are entitled to for the next five years.

When the Pension Credit is introduced

  33.  Prior to implementation, efforts will be made to make sure all pensioners are made aware of the Pension Credit and those who stand to gain are encouraged to apply. Before the Pension Credit is introduced, The Pension Service will write to the 1.8 million people who are already receiving the Minimum Income Guarantee and provide reassurance that their Pension Credit will be calculated without the need for them to make a new claim.

  34.  In addition to the existing MIG recipients, there are 6.3 million households with someone aged 60 and over of whom it is estimated that some 2.4 million could be entitled to Pension Credit. Whilst it is essential to ensure that Pension Credit is widely known amongst the potentially eligible population by the start date, past experience with MIG take-up has shown that a more targeted approach is needed to ensure success with particular groups and to ensure customer queries and applications are dealt with as quickly as possible.

  35.  The Government intends, therefore, to run a general, national publicity campaign, focused on how The Pension Service will assist people to take up their entitlement. Pensioners will be able to claim and receive a decision in advance of the start date. Following on, there will be a carefully measured spread of more targeted publicity which will invite responses over the first year of implementation. The aim will be to smooth the peak of customer contacts and claims activity that would otherwise occur around the start date. However, pensioners who delay claiming until they are contacted will not lose out as special provisions will allow any pensioner who claims in the first year to have their claim backdated to the start date.

COST OF PENSION CREDIT

  36.  The total cost of the Pension Credit and changes to Housing Benefit and Council Tax Benefit will be around £2 billion in 2004-05. Over the longer term, forecast spending on pensions remains affordable and sustainable as explained in the Government's recently published paper "The Pension Credit: Long—Term Projections". (Copies were sent to the Committee on 17 January.)

TAKE-UP LEVELS

  37.   For the purposes of the estimates, take up is assumed to be 67 per cent in 2004 as entitlement to the Pension Credit is gradually established. (This is consistent with the 2001 Pre-Budget Report forecast.) This is ambitious as it means taking on an extra million pensioners in the first year but it is a reasonable assumption which fits with the current published estimated take-up for Minimum Income Guarantee. Tables included in the paper mentioned above set out the estimated cost of the Pension Credit reform package under the assumption that take-up in all shown years except 2004 is 100 per cent. An illustrative estimate is also included, assuming 80 per cent take-up for the subsequent years.


 
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