Select Committee on Work and Pensions Second Report


Pension Credit: the issues


20. One of the Pension Credit's two principal policy aims is "to tackle poverty amongst today's pensioners".[38] The Credit, in its first full year of operation, will represent approximately £2 billion of extra spending per year by the Government, which estimates that around 1.2 million pensioners will benefit from the improvements to the guarantee credit, with a further 4.1 million gaining from the savings credit and changes to the treatment of capital.[39] These estimates, if met, will represent an undeniably welcome step toward combatting the evil of pensioner poverty, a subject upon which the Social Security Select Committee produced an extensive Report in the last Parliament.[40] The Government estimates that between a quarter and a fifth of pensioner households still live in poverty, that is with incomes less than 50% of mean income, and has committed itself to reducing this number.[41] The Institute for Fiscal Studies (IFS) estimates that the poorest decile of pensioners will gain an extra £10 a week, on average, as a result of the Pension Credit, which is a positive step toward this goal.[42] As with many of those who have submitted evidence to our inquiry, we welcome the extra spending that the Pension Credit will represent.[43]

21. However, it has been represented to us that there inevitably has to be a trade-off, to some extent, between the two aims of the Credit - fighting poverty and rewarding saving. Those who have private capital or second incomes, and therefore receive the extra help from the savings credit, will not, on the whole, be the poorest pensioners. As Hertfordshire County Council told us: "The Credit will assist those pensioners with modest savings and second pensions. These are pensioners who merit support but they are not the pensioners in greatest poverty."[44] It should also be noted that, at a time of generally rising standards of living, the Pension Credit, to which over half the pensioner population will be entitled, will only bring pensioner incomes up to approximately 20 per cent of average earnings.[45]

22. The extent to which the Credit will help the very poorest pensioners will, crucially, depend on the levels of take-up and the policy for the future uprating of its value - the guarantee level in particular. We return to these issues later in our Report.


23. The Pension Credit ameliorates a situation that was widely perceived as unfair, whereby pensioners who had saved for their retirement could have exactly the same final income as those who had not. For example, to use the current benefit levels, a pensioner with a full Basic State Pension of £75.50 per week, plus £10 from an occupational pension, will have their income topped up to the (2002) level of the MIG: £98.15. A pensioner 'next door', though, who has not saved for their retirement, or does not even have a full Basic State Pension entitlement, will also end up with the same weekly income of £98.15, through the operation of the MIG. Much of our evidence has recorded the resentment that those who have saved feel toward this situation and has, therefore, welcomed the rewarding of thrift.[46] The TUC for example reported that, through its two pension telephone help lines: "it has become clear that pensioners who have managed to save moderate amounts for retirement feel a great sense of frustration that they are no better off than those who have saved nothing."[47] Similarly the National Federation of Post Office and BT Pensioners stated: "a Pension Credit designed to remove the anomaly that those who have saved all their lives but were no better off than those who had saved nothing, must be welcomed".[48] We welcome the recognition and extra reward that the Pension Credit will provide for most of those who have saved for their retirement.

24. There is, however, one notable group of pensioners who will not benefit to the same extent from the savings credit: those who do not have a full Basic State Pension. The savings credit only rewards qualifying income above the level of the Basic State Pension.[49] For those without a full Basic State Pension, any extra income is used to bring the pensioner's income up to that level, and only the excess is rewarded. Five examples of how different (single) pensioners will be treated by the Pension Credit are given in Table 1, to illustrate the mechanism.

Table 1: Comparative Treatment of those without full Basic State Pension by the Pension Credit

Basic state pension
Second income
Final income
(£100 + 60% of second income above the level of full Basic State Pension)
Full Basic State Pension in 2003: £77 per week (single pensioner).

25. As can be seen, Betty's weekly income is brought up to the guarantee level (£100) but she receives no reward for her extra £10 of saving, as she does not have a full Basic State Pension. She has the same final income as Arthur, who also does not have a full entitlement, or Doris, neither of whom have actively made extra provision for their own retirement. Similarly, the first £10 of Charles' second income is used to bring him up to the level of the Basic State Pension and only the remaining £10 is eligible for the guarantee credit. He therefore receives the same 'reward' as Eric who, theoretically, only saved half as much.

26. There are many reasons why people fail to qualify for a full Basic State Pension. It could be that, at periods, their earnings were too low to pay National Insurance contributions, or they had caring responsibilities, which, in some instances, precluded them from accruing rights to the Basic State Pension. Nevertheless, they may have made efforts to provide for an income in retirement, through contributions paid into an occupational pension at different periods of their lives, or through a private pension. However, under the Pension Credit proposals, the lack of a full Basic State Pension effectively wipes out the extra savings effort they made.

27. A very high proportion of those who submitted evidence to this inquiry have highlighted the treatment of this particular group and have recommended that they should receive the full reward for their thrift.[50] As discussed above, most of those affected by this ruling will be pensioners who have had poor opportunities to save, those who have suffered from periods of sickness or disability, those who have had to care for others, etc. - exactly the groups who are most at risk of falling into poverty during retirement. As Mervyn Kohler, of Help the Aged, told us: "poverty tends to arrive as a result of poor opportunities to save, poor work records, etc.".[51] The National Association of Pension Funds (NAPF), similarly stated that: "The poorest pensioners are often those with a chequered work history".[52] Given that one of the chief aims of the Credit is to target pensioner poverty, this aspect of the Credit's operation seems perverse.

28. Many of the memoranda highlight the fact that it will be women who suffer disproportionately from this calculation method. As Table 2 shows, significantly more women than men do not have entitlement to a full Basic State Pension - either in their own right, or as a dependent. It should be noted, though, that it is only those women with entitlement neither in their own right nor as a dependent, who will be affected by this rule.

Table 2: Men and women receiving full Basic State Pension, expressed in numbers and as percentage of the pensioner population[53]

Entitled in their own right
Entitled, including wives and widows#
# - Including Category A, AB, ABL, B, BL and D state pensions

29. As can be seen, 17 per cent of female pensioners (over one million women) will potentially have any private or occupational income unrewarded, compared to only 8 per cent of male pensioners. This would appear to contradict the Government's assertion to the Committee that the Credit will be of "particular help to women".[54] Indeed, the National Federation of Post Office and BT pensioners went so far to say that the Credit will "actively discriminate against women".[55]

30. The ABI drew our attention to the difficulties that this particular rule created for its members when selling pensions, particularly in relation to Stakeholder Pensions. Adrian Boulding, of Legal and General, explained that Stakeholder Pensions were sold to "generic groups", such as a number of employees from a particular firm gathered together for a pensions presentation, and that individual advice was impractical owing to the constraints of time and the differences in future circumstances. It was, therefore, "critically important for that adviser to be able to give the same message to everybody in the room...and quite simply say to them, 'If you save money now, you will be better off in retirement than if you had not'."[56] He added that, if all saving, instead of only that above full Basic State Pension level, were rewarded then advisers would, regardless of all the other imponderables in life, be able to confirm the Government's key message - that it will always pay to save - was true in every case. In the light of the Secretary of State's desire for significant increases in the number of funded pensions, we are surprised that a measure that would so obviously help the private pensions industry has not been adopted.[57]

31. Owing to inadequate administrative data, the Department was, unfortunately, unable to provide us with an accurate number of the pensioners who will be affected.[58] However, it estimated that:

  • around 1.4 million pensioners had incomplete Basic State Pension rights;
  • 500,000 "benefit units" - single pensioners and pensioner couples - would not receive the savings reward. Of these, ten per cent had private incomes which would have qualified for the savings credit had they had full Basic State Pensions. The average weekly private income of this ten per cent was £20; and.
  • a further 200,000-300,000 pensioners who would be eligible for the savings credit, had partial Basic State Pension rights.

This suggests there will be around 50,000 pensioner 'benefit units' who have private income for which they will see no benefit. On average, they will be missing out on £12 a week (60% of £20). Another 2-300,000 will be 'rewarded' for only some of their private savings. In total, at least a quarter of a million pensioners will have some or all of their second income ignored by the savings credit. Although there may be debate over this figure, all sides of the argument agree that the number will steadily decline over time owing to the phasing out of the married woman's option to rely on her husband's NI contributions and the introduction, in 1978, of home responsibilities protection (HRP)[59] for the Basic State Pension.[60] The total cost of altering this ruling would, therefore, steadily decline over time.

32. We raised many of these issues with the Secretary of State when he gave oral evidence but he offered no hope of change. He argued that to change the Credit as has been suggested would result in "rewarding someone who had not actually done what they were supposed to do and that is to pay their contributions towards the Basic State Pension."[61] However, since those employees and the self-employed earning above the lower earnings limit are obliged by law to pay their NI contributions, it is only those who choose not to work for reasons which preclude them from HRP, or who earn less than the lower earnings limit for much of their working lives, who will have less than full Basic State Pensions in the future. We believe that the operation and effectiveness of the Pension Credit would be significantly improved if it 'always paid to save', i.e. if all second pension and savings income was rewarded by the savings credit, not only that above the level of a full Basic State Pension. It would ensure that all those who had saved for their retirement, including the poorest and most disadvantaged pensioners, were better off in retirement for having saved; it would prevent the danger of women receiving disproportionately less assistance from the Credit than men; and it would greatly assist the private pensions industry when selling pensions. We recommend that the Government should inquire into the immediate and long-term costs, benefits and affordability of extending the Pension Credit in this way and make public the results.


33. The second key aim of the Pension Credit is to "boost the incentive for future pensioners to save for their retirement".[62] As we have already discussed, the Credit should ensure that (with the exceptions noted above) those who have saved for their retirement will be better off than those who have not. Not only is this a more equitable situation, the Government argues, but it will actively help to increase the amount people save for their future.[63] Unlike the MIG it will ensure, "that working age people are encouraged to save and know that they will be rewarded for doing so".[64] The importance of increasing individual provision was underlined by the ABI who told us, in its written memorandum, that there was an estimated £27 billion gap between what people currently saved for old age and what they needed to save for a comfortable retirement.[65]

34. Whilst most of the evidence presented to us agrees that, generally, pensioners will be better off as a result of saving, it is less clear that the non-pensioner population will be inspired to save more because of the Credit. Hertfordshire County Council suggested that: "Decisions about saving are not usually governed by considerations of the impact of benefit rules. If that were the's pensioners would have chosen not to save - given the present disincentives to do so."[66] Many others who submitted evidence argued that even if the benefits system could influence saving patterns, the Credit was simply too complex an instrument actively to influence behaviour among younger people. The IPPR, for example, told us that the Credit was: "an highly opaque means of generating the right incentives: it is extremely difficult for individuals to know what to expect from it".[67]

35. We have also received a significant amount of evidence which suggests that for some people and groups the return for saving more for retirement may be diminished by the Pension Credit. As we have already noted, the Credit will ensure that pensioners who have full Basic State Pension rights will have a higher income in retirement if they save, than if they do not. However, the Credit will also alter to what degree people who save will be better off, for each extra pound of saving they make before retirement. For some, the gain in their income from an extra pound of saving (the return) will actually be less than without the Credit (although still positive). This is a technical point. Age Concern concludes, therefore, that: "Younger people considering their retirement provision, may decide that even if they are better off from having saved, they may not be sufficiently better off to make saving worthwhile."[68] Many other witnesses, have agreed with this assessment, describing the effect on incentives to save as "unclear"[69]; "more likely to be negative than positive";[70] or, in the case of Mr Andrew Dilnot, of the IFS, "If the fairness thing is the problem, I think the Government is on a very strong wicket. If the Government wanted to assert that this is a way of significantly increasing the incentive to save, then it is on a much more difficult wicket."[71]

36. For those pensioners in receipt of the savings credit, Housing and Council Tax Benefits the reward for receiving an extra pound of second pension or savings income is particularly low. These benefits are means-tested; the amount of benefit an individual receives falls as their income rises. So, for example, a pensioner who receives a £1 uprating, above inflation, in their second pension would retain 60 pence as a result of the workings of the Pension Credit and have to pay more in their rent and Council Tax bill. Age Concern, and others, have argued that a pensioner in receipt of the savings credit and Housing Benefit and Council Tax Benefit would, owing to the interaction of the savings credit and the withdrawal of HB and CTB, lose 91% of any increase in their retirement income - i.e. if their income rose by £1 they would only see a 9p increase in their disposable income.[72]

37. We accept that much of the evidence on this subject is highly technical and complex, and that people's decisions to save, or not to save, are not usually determined on such precise calculations, or estimates, of future returns. The prospect of being better off in retirement does not necessarily mean that all people will save; some may need the money now more than they expect to in retirement. We do, also, recognise what the Secretary of State told us: that it is very important that the right incentives and rewards are built into the system of state pension provision.[73] Most of the evidence we have received accepts that the Pension Credit is a significant improvement on the MIG in this respect. We have concluded that, whilst the Pension Credit will enable today's pensioners to see a reward for saving, there is no clear evidence that it will actually increase younger individuals' savings.

38. Our inquiry only touches part of a much wider issue - what Mr Darling described as one of the Government's "big challenges" - of how to encourage greater individual saving for retirement, especially for groups such as the young and the self-employed.[74] The issue of how much and in what form to save - through a pension or not, what kind of pension, etc. - remains a complicated one in which individuals will have to weigh up a range of uncertainties. We have received no evidence that the Pension Credit will make decisions about saving for retirement any simpler. This is an issue to which we may return in the future.


39. The savings credit element of the Pension Credit will reward any additional income in the form of earnings, as well as that from savings such as occupational pensions, capital, etc. (which we have already discussed above). As with the current MIG, the first £5 of income from any earnings will be excluded in all calculations of Credit entitlement (£10 for a couple). However, any earnings beyond that amount will lead to a loss of Credit of 40p for every extra pound earned. So, if a pensioner earned an extra £15 a week, for example, they would only be £11 better off, owing to the method of calculating the Credit - effectively a 40% tax rate on all earnings above £5.

40. Many of those who submitted evidence to our inquiry are highly critical of this aspect of the Credit's calculation. They argue that it offers little, if any, incentive for pensioners to continue working or to seek new employment opportunities. Part-time work is one of the few, simple, methods for a pensioner to increase their retirement income and as the NPC, for example, stressed: "part-time earnings could have a significant impact on pensioner poverty".[75]

41. Other evidence also highlighted the apparent inconsistency between this aspect of the Credit and the Government's policy of promoting 'active ageing' - encouraging older people to continue participating in the labour market.[76] For example, in the UK's Employment Action Plan 2001, the Government committed itself to reviewing "tax and benefit systems in order to reduce disincentives and make it more attractive for older workers to continue participating in the labour market," saying that "our objective must be to get people to work longer than at present".[77] As the Industrial Society commented: "By discouraging part-time work after retirement, this seems to be an example of un-joined-up Government at its worst."[78]

42. The three charities representing pensioners who gave oral evidence to this inquiry all agreed that a disregard of around £40 of earnings would be a very productive measure. Sally West, of Age Concern, suggested that it would allow "a day's work without it disrupting the administration of the system and encouraging people to keep active in work if that is what they wish to do".[79] We agree with this view and were disappointed that the Secretary of State could hold out "no hope" of a change in the rules.[80] We urge the Government to reconsider its policy on the Credit's treatment of earnings and, subject to cost and affordability shown consequent to such reconsideration, strongly recommend that the first £40 of all weekly earnings income be disregarded in the calculation of the Pension Credit to encourage more pensioners to remain involved with the labour market.


43. The interaction of the new Pension Credit with other aspects of the benefits system will naturally be crucial if the Credit is to achieve the Government's aims. One of the biggest single concerns to emerge following the launch of the Credit's consultation paper was its relationship, in particular, with Housing Benefit and Council Tax Benefit. Many of those who commented on the Government's proposals feared that, unless properly integrated, any gains for the poorest pensioners from the Pension Credit could be lost immediately through reduced HB and CTB.[81] The Government heeded these concerns and, in its final proposals, announced that the level at which pensioners qualified for help from the two benefits would be raised in line with the Pension Credit. The new rules for the treatment of capital in the calculation of entitlement to Credit (see paragraph 17) would also be extended to HB and CTB.[82] In this way, the Government assured us, "Nobody will lose Housing Benefit or Council Tax Benefit as a result of the Pension Credit."[83]

44. The evidence we have received in this inquiry confirms that the effect of the Government's announcement is that gains from the Credit will not be "clawed back" through loss of HB and CTB entitlement.[84] For example, Sally West, of Age Concern, told us that the DWP, "is right in saying that people cannot lose."[85] Andrew Dilnot, of the IFS, similarly agreed that the Government had, "given their objectives," hit on the right solution to the problem of the Credit's interaction with HB and CTB.[86] He did raise a note of caution, however, commenting that the Government still needed to devise a strategy for the long-term reform of both benefits; something which the Social Security Committee in the last Parliament considered in some detail.[87] We welcome the Government's proposed changes to the rules governing entitlement to Housing Benefit and Council Tax Benefit, which should ensure that no pensioner loses benefit as a result of the Pension Credit. These changes do not, however, alter the case for a more fundamental re-examination of Housing Benefit. Given that the take up of Council Tax Benefit is particularly low amongst pensioners, it is also vital that the introduction of the Credit is underpinned by campaigns to promote Council Tax Benefit take up.

45. It is less clear, though, how entitlements to Pension Credit will affect the amount that local authorities require people who receive care in their own homes, or care in residential and nursing homes, to pay towards the cost of that care. There is a real risk that these pensioners will see little, if any, benefit from the Pension Credit. Hertfordshire County Council told us that it had: a "particular concern at the apparent failure of the Department of Health to consider the Pension Credit when issuing guidance to local authorities on home care charging policies."[88] It reported that new charging policies for services, such as day centres, home helps and Meals on Wheels, were due to be introduced from April 2003 and that, "in the absence of adequate guidance from the Department of Health, it is possible that the real gains introduced by the Pension Credit could be negated by charging policies designed without regard to the new benefit." The groups representing pensioners echoed these worries in their oral evidence, drawing our attention not only to those paying for care at home but also those living in residential homes. Richard Wilson, of Help the Aged, told us: "It seems difficult if you are going to say saving always pays but then they give you your pension with one hand and take it away with the other, via the Department of Health and charges. That will not make sense to ordinary pensioners."[89] The need for greater "joined-up Government" between the Departments of Work and Pensions and Health, were also raised during the debate on the State Pension Credit Bill in the House of Lords.[90]

46. We raised these concerns with the Secretary of State when he gave oral evidence to the Committee. He stated that "what local authorities charge for home care is essentially a matter for them" and that "guidelines will be issued from time to time".[91] In a supplementary memorandum to the Committee, he clarified this point, stating that guidance on charging policies recently issued by the Department of Health would ensure that "the vast majority of Pension Credit recipients will also be entitled to free home care" and that discussions between the two Departments were continuing over the interaction of charges for residential care services and the Credit.[92]

47. We understand that at present, in determining how much a pensioner has to contribute towards care home fees, local authorities are required to treat capital in the same way as they are currently treated for the MIG. Although the capital limits are higher, the notional rate of income from capital is the same - £1 a week for every £250 of capital between the limits. If the extra income that pensioners in care homes receive from the Pension Credit is taken away in higher contributions to care home fees, then the message that it always pays to have saved will not be true for a significant number of retired people. We believe that the Department for Work and Pensions and the Department of Health need to make clear how the proposals for the Pension Credit will interact with care charges: pensioners in residential care do not yet know if the real increase in pensioner income from the Credit will be lost through increased home care charges.

38   Ev 98, para 2. Back

39   Ev 101, para 20. Back

40   Pensioner Poverty, Seventh Report of the Social Security Committee, Session 1999-2000, HC 606. Back

41   Opportunity for All: Third Annual Report, DWP, 2001. Back

42   Ev 50, para C1.  Back

43   Also see: Ev 136, para 20; Ev 160; and Ev 163, para 1.8. Back

44   Ev 145. Also see: Ev 11-12, paras 3.3 and 4.2; Ev 30, para 7.2; and Ev 155, para 26. Back

45   Ev 83, para 3; and Ev 149, para 1.1. Back

46   See, for example: Ev 1, para. 3.2; Ev 12, paras 3.3 and 4.1-4.2; Ev 138, para 36; and Q. 3. Back

47   Ev 163, para 1.8. Back

48   Ev 136, para 20. Back

49   It should be noted that for a pensioner couple, where both had entitlement to full Basic State Pension in their own right, part of their Basic State Pension above the guarantee threshold (£123 in 2003) would also qualify for the savings credit. Back

50   Ev 2, para 5.2; Ev 15, paras 11.12-11.23; Ev 28, para 5.2; Ev 126, para 3c; Ev 136, paras 22 and 39-41; Ev 149, para 1.2; and Ev 164, para. 2.5. Back

51   Q. 31. Back

52   Ev 169, para 2.3. Also see: Ev 68, para 2.14. Back

53   Commons Official Report, column 1123W, 7 February, 2002 and Lords Official Report, column WA14, 28 January 2002. Back

54   Ev 106, para 16. Back

55   Ev 136, para 22 (b). Back

56   Q. 15. Back

57   Q. 184. Back

58   Ev 108. Back

59   Home Responsibilities Protection (HRP) helps a person satisfy the contribution conditions for State Retirement Pension, by reducing the number of years for which they would otherwise have to satisfy those conditions. HRP applies for any year where a person is receiving Child Benefit for a child under 16; is receiving Income Support carer's premium; or is caring full­time for someone receiving the higher rates of Disability Living Allowance or Attendance Allowance. Back

60   QQ. 98, 130 and 186. Back

61   Q. 186. Back

62   Ev 98, para 2. Back

63   See, for example: Ev 102, para 23. Back

64   Ev 102, para 21. Back

65   Ev 1, para 2.3. Back

66   Ev 144. Back

67   Ev 69, para 2.20. Back

68   Ev 42. Back

69   Ev 85, para 20. Back

70   Ev 154, para 19. Back

71   Ev 85, para 19; Ev. 147, paras 8 and 11; Ev 154, para. 19; and Q 99. See also: QQ. 82 and 112; Q. 104; Q. 129; Ev 158, para 2; Ev 165; and Ev 169, para 2.3. Back

72   Ev 42. See also: Ev 48, para B4; and Ev 68, paras 2.16-2.18. Back

73   Q. 198. Back

74   Q. 196. Also see: QQ. 5 and 130. Back

75   Also see: Ev 17, paras 11.20-11.22; Ev 30; Ev 42; Ev 146, paras 4-5; Ev 149, para 1.5; Ev 155, paras 23-25. Back

76   See, for example: Winning the Generation Game, Cabinet Office, April 2000. Back

77   UK Employment Action Plan 2001, p. 12. Back

78   Ev 147, para 5. Also see: Ev 149, para 1.5. Back

79   Q. 64. Back

80   Q. 202. Back

81   For example see: Pension Provision Group: a commentary on the Pension Credit proposals, 6 March 2001, pp 22.  Back

82   The Pension Credit: the Government's proposals, November 2001, DWP, p. 6. Back

83   Ev 100, para 7. Back

84   IbidBack

85   Q. 72. Also see: Ev 48, para B4; and Ev 164, para 2.8. Back

86   Q. 114. Back

87   Housing Benefit, Sixth Report of the Social Security Committee, Session 1999-2000, HC385-I. Back

88   Ev 144. Back

89   Q. 75. Also see: Ev 18, paras 13.2-3. Back

90   Baroness Barker, Lords Official Report, 18 December 2001, column 151.  Back

91   Q. 206. Back

92   Ev 125. Back

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