Select Committee on Work and Pensions Minutes of Evidence


Annex A

IMPACT OF PENSION CREDIT ON PENSIONER POVERTY

  1.  In 1997 the pension system was failing to provide enough support for today's pensioners and failing to provide security in retirement for future pensioners. The key problems the Government sought to address were as follows:

    —  The gap between better-off and poorer pensioners was growing. On average, pensioner incomes have been increasing faster than the incomes of those in work, but too many were left behind. Between 1979 and 1997, the incomes of the richest fifth of pensioners rose by 80 per cent but the incomes of the poorest grew by only 30 per cent.

    —  Too many pensioners were living in poverty. At least two million over-60s were living at or below income support rates. In 1997 the minimum income for a single pensioner (aged 60-75) was set at £68.80 a week.

    —  Too many people of working age were heading for poverty in retirement. Many of those who could afford to save were not doing so, or were not saving enough. Roughly two in five workers were not making any voluntary provision for their retirement.

  2.  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. Pension Credit is the crucial next stage of a comprehensive Government strategy for older people. Pension Credit, together with the introduction of the Pension Service, seeks to address and remedy 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.

    —  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—it is estimated that in 2001-02 around 460,000 pensioners will have an income up to only £10 above their Minimum Income Guarantee level and around 580,000 will have an income no less than £10 below that level.

    —  The system is regarded as intrusive and bureaucratic, 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.

  Pension Credit will be of particular help to women and older pensioners—two groups about whom the Select Committee expressed particular concern.

Income inequality

  3.  The overall growth in pensioner incomes over the last 20 to 30 years conceals serious and growing income inequalities among pensioner households. Detailed discussion was set out in the Seventh Report of the Select Committee on Social Security and the Department of Social Security's response.

Defining poverty

  4.  Based on research carried out by the Family Budget Unit, Age Concern proposed in 2000 that a single pensioner needed at least £90 a week and a couple £135 a week (plus rent and council tax) to avoid living in poverty. An estimated 52 per cent of single pensioners and 24 per cent of couples had net incomes after housing costs of less than these amounts. The Select Committee for Social Security felt that the Age Concern figure of £90 for a single pensioner constituted a good starting point for an absolute poverty "target". Minimum Income Guarantee levels have now outstripped this target and, with the introduction of Pension Credit, the guarantee credit will be no less than £100 for single pensioners and £154 for couples, in 2003.

  5.  However, in its Seventh Report, the Committee noted the difficulties associated with developing such a concrete definition of what constitutes poverty. Mr Andrew Dilnot of the Institute of Fiscal Studies told the Committee, "if we assert that we have been able to define a particular level as being the poverty level, we have almost certainly misled ourselves."

  6.  The Government agrees that there is no single research method which can be used to assess the adequacy of benefit levels. What people need to live on varies greatly depending on their needs, and a range of factors such as proximity to friends and relatives. The Government, therefore, considers a range of research when setting benefit rates and commission a wide range of research into pensioners' incomes, lifestyles, attitudes and aspirations and will continue to do so.

What has already been achieved?

  7.  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 Pension Credit is introduced in addition to these policies single pensioners will find themselves on average at least £23 a week better off in real terms and couples will be on average at least £32 a week better off than in 1997.

  8.  The Government's low-income indicators, as set out in Opportunity for all, Making Progress[1] show the following developments since 1996-97:

    —  Around half a million fewer pensioners are living in households with low income in an absolute sense (below 1996-97 real terms thresholds);

    —  The proportion of pensioners living in low-income households has fallen from 21 per cent to 17 per cent on the before housing costs measure and from 27 per cent to 19 per cent on the after housing costs measure;

    —  The 1999-2000 data for relative low incomes does not show improvements against the baseline, suggesting that the incomes of the poorest pensioner households have not kept pace with average increases in incomes for all households. However the 1999-2000 data does show encouraging signs that the rising trend is being stemmed; and

    —  The Government also monitors persistent low incomes: 18 per cent of pensioners lived in a household with a low income in at least three out of the four years between 1996 and 1999.

  9.  In addition, Opportunity for all, Making Progress highlights significant progress in other areas:

    —  Working-age people are contributing £19 billion more in real terms to non-state pensions and the proportion of people making continuous contributions has increased.

    —  The proportion of older people being helped to live independently at home has increased.

  10.  The latest data for the income indicators is for the year 1999-2000 and does not reflect the effect of several policies, either already introduced or recently announced, that would improve the incomes of pensioners, particularly those at the bottom end of the income distribution.[2] These include:

    —  MIG improvements: the continuing rise of MIG in line with earnings so that by April 2003, no pensioner will have to live on less than £100 a week, and pensioner couples will receive £154 a week; doubling of the lower capital limit from £3,000 to £6,000 and increase in the upper limit from £8,000 to £12,000 in April 2001—existing MIG recipients who benefit from this change will gain an average of £6.30 a week;

    —  above-inflation increases in the basic state pension of £5 a week for single people and £8 a week for couples in April 2001 followed by increases of £3 a week for single people and £4.80 a week for couples in April 2002; and

    —  Winter Fuel Payments of £200 in 2000-01 and 2001-02.

The Next Step: Pension Credit

  11.  By the time the Pension Credit replaces the MIG in 2003, it is estimated that 4.1 million (includes 200,000 residential care and nursing home cases) pensioner households stand to gain. This corresponds to 5.3 million pensioners.

  12.  On average, pensioners will gain just over £400 per 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/Council Tax Benefit as well as Pension Credit.

Help for older pensioners

  13.  The Select Committee on Social Security noted, in its Seventh Report, that generally, older pensioners face greater challenges than those who are recently retired. The Government has promised and delivered help to all elderly pensioners. Free TV licences will provide £2 a week to pensioners aged 75 and over.

  14.  However, there is a wide range of incomes even among older age groups. Evidence from the Family Resources Survey shows that the biggest gap in pensioner incomes is between people in the same age group rather than between different age groups. Among single pensioners in the "over 80s" group, average weekly incomes ranged from £69 for the poorest fifth, to almost three times this level (£203) for the richest fifth. Table 1 shows that the difference in average income between age groups is relatively small for both pensioner couples and single pensioners. In comparison, within age groups the gap between the bottom fifth and the top fifth is much larger. This is shown by the ratio of the medians in the final column.

Table 1: Net income of pensioner benefit units, by age, 1998-99
Pensioner couples:
Average income
Quintile medians
Radio of medians
Age
Mean
Median
Bottom fifth
Top fifth
Top fifth/Bottom fifth
  
  
  
(1)
(2)
(2)/(1)
Under 75
288
227
134
467
3.5
75-79
235
187
124
382
3.1
80 or over
243
190
117
416
3.6
All ages
272
214
127
438
3.5
Single pensioners:
Under 75
149
121
71
236
3.3
75-79
133
115
70
201
2.9
80 or over
132
116
69
203
2.9
All ages
141
118
71
218
3.1
Source:Family Resources Survey 1998-99

All incomes are expressed in £ per week at July 1998 prices.

  15.  The Government believes that it is right to confront income inequality and continues to target resources at the poorest pensioners regardless of age. Of the 4.1 million pensioner households who will be entitled to Pension Credit in 2003-04, over a quarter (28.5 per cent) are age 80 and over.

Help for women pensioners

  16.  The Select Committee on Social Security found, in its Seventh Report, that women pensioners are at particular risk of poverty. They are at greater risk from the relative decline in their pension income over retirement because they tend to live longer than men; and women tend to have smaller occupational pensions—they are likely to have had a more intermittent, lower paid work history than men. Pension Credit will be of particular help to women.

  17.  Of the 4.1 million pensioner households who will be entitled to Pension Credit in 2003-04—just over half (53 per cent) will be single women and around 30 per cent will be women and men in a couple. Moreover, half the women entitled to the Pension Credit will be aged 75 or over.

BREAKDOWN OF THOSE ENTITLED TO PENSION CREDIT BY AGE AND GENDER

Pensioner households entitled to Pension Credit as a proportion of total entitlement

  
Age
Per cent
Per cent
Single men
60-74 75-79 80+
9 3 4
16
Single women
60-74 75-79 80+
22 12 19
53
Couples
60-74 75-79 80+
20 6 5
31
Total
  
100
100

January 2002


1   Third Annual Report 2001, Cm 5260. Back

2   Overall changes in the indicators will also depend on factors such as the value of occupational pensions, earnings growth, changes in employment and changes in the income distribution. All of these can act to dampen or enhance the positive effect of policy changes. Back


 
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Prepared 12 April 2002