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Pension Schemes

Volume 488: debated on Wednesday 25 February 2009

To ask the Secretary of State for Work and Pensions what steps the Government have taken to ensure that under the new pension auto enrolment scheme due to start in 2012 each £1 invested by an individual saver, their employer and HM Revenue and Customs will net £1 of value (investment and inflation). (257442)

Our reforms contain a number of measures to boost the value of pension saving:

From 2012, employers will be required to automatically enrol their workers into a qualifying workplace pension arrangement and contribute to that arrangement. Employer contributions will be a minimum of percent on a band of earnings, and around 1 per cent. in the form of tax relief. Overall contributions, including the employee contribution, will be at least 8 per cent.

The new personal accounts scheme will be one of the pension schemes available to employers to meet the employer duty from 2012, and is designed to be low cost to minimise the impact of charges on the value of saving.

A more generous and simpler state pension to provide a solid foundation for saving. By 2050 just 30 per cent. of pensioner households are projected to be entitled to pension credit, compared to 45 per cent. today.

There are also measures to boost the value of saving within the existing pension and benefits system:

Pension rules allow up to 25 per cent. of a pension pot to be taken as a tax free lump sum.

In addition the ‘trivial commutation’ rules allow individuals with small pension funds to take the full amount as a lump sum (£16,500 in aggregate private pension saving in 2008-09, of which up to 25 per cent. may be tax free).

The savings credit was designed to reward those who have made small savings for their retirement.

Capital disregards in the benefit system mean that small amounts of capital do not affect benefit entitlement.

Some working age benefits and tax credits discount some or all of the value of pension contributions when calculating benefit entitlement.

Those people who see a lower impact on their net retirement income due to interactions with the benefit system will still get the full value of their private savings, and many will also be receiving generous top ups from the state to boost their total income, due to their needs in retirement. This could be due to circumstances such as needing extra support, for example due to disability.

The report of the Savings Incentive Work programme “Saving for retirement: Implications of pensions reforms on financial incentives to save for retirement showed” that, on standard assumptions, over 95 per cent. of savers modelled could expect to get more than £1 plus inflation back for each £1 contributed, and a large majority could expect double that. It also showed that for a range of case studies the reforms improve the payback on saving. The report also explored a number of measures proposed by stakeholders to further improve returns which suggested that the Government have struck a good balance between the competing objectives of affordability, incentivising saving and alleviating poverty—on balance the package does not need to be changed.