Citizens Advice is the national body for Citizens Advice CABx (CABx) in England, Wales and Northern Ireland. The CAB service is the largest independent network of free advice centres in Europe, with 430 main CABx in England, Wales and Northern Ireland. CABx provide advice from over 3,300 outlets, including CABx in the high street, community centres, health settings, courts and prisons. All CABx are registered charities.
The CAB service has twin aims: to ensure that individuals do not suffer through a lack of information about their rights; and equally to exercise a responsible influence on the development of policies and practices, both at a local and national level.
In 2006/7 the Citizens Advice service helped with 11,544 personal pensions, savings and investments problems. This represents an increase of 23 per cent in the last year. The service also advised on 70,341 problems relating to pension credit, an 8% increase on 2005/6.
We also advise many people with debt problems who have no savings or assets which means that they have limited ability to deal with financial shocks.
Key points
Citizens Advice welcomes the overarching aim of the Pensions Bill, which is to improve savings for retirement among low-income groups through the establishment of Personal Accounts into which individuals will be automatically enrolled. We believe that in order for Personal Accounts to be successful three main issues must be addressed:
- Firm foundations: If people on very low incomes are going to save in a long term pension scheme to improve their income in retirement they need to feel confident about what the level of their income from the state pension will be and not risk having their extra savings 'means tested away’ from them at a later stage;
- Employer engagement: We envisage a significant challenge in engaging employers to comply with their responsibilities in relation to Personal Accounts, especially where low income workers are involved. A full range of measures to deal with employer avoidance is therefore needed.
- Advice: Financial advice and education, for both employees and employers will be critical to help both employers and employees understand the options available and exercise an informed choice about Personal Accounts.
Citizens Advice and pensions
Citizens Advice is interested in the issue of pension provision for a number of reasons.
Firstly, CABx across the country see the impact of pensioner poverty today. Pension provision, and security in old age, is of huge importance to our clients, many of whom are on low incomes, or have interrupted work histories. Many current pensioners visit CABx because they are unable to make ends meet. Many of these people are not claiming all of the means tested benefits that they are entitled to.
A 79 year-old client and his wife had struggled to survive on less than £110 a week because they had not heard of pension credit. The client had arthritis in his knees and right hip, diabetes, asthma and prostate problems, was virtually housebound and couldn’t get upstairs. He was referred to the CAB by social services for help claiming disability benefits. Visiting the client and his wife at home, the CAB adviser found the couple sitting in a cold living room with only a panel convector heater for heat. Both were sitting in multiple layers of clothing and the adviser thought it too cold to take off his own outdoor coat. The client had an income of £69.74 a week (minus £7 for recovery of a past debt), and his wife’s income was £49.34 a week. The couple were also paying £32 a month over 10 months towards their council tax, as they only got partial council tax benefit.
Secondly, CABx see lots of people struggling with debt and financial problems today who have nothing put by for a rainy day, let alone for their old age and retirement. The number of debt problems dealt with by the Citizens Advice service has doubled in the past ten years.
Thirdly, we know that most people can benefit from more help such as advice and education but there is a scarcity of such services for people on lower incomes. The introduction of Personal Accounts should provide an opportunity to address this need for education and advice.
The most obvious barrier to saving for people in poverty is that their incomes are too small to sustain anything other than essential spending. Benefit levels are extremely low. People on income support might receive as little as £59.15 Current rate for over 25 year-olds a week to meet all their living expenses except rent. People on incapacity benefit, even those with children, might get as little as £4,000 a year to live on.
Personal Accounts
Citizens Advice is broadly supportive of Personal Accounts. However, we have identified three things which are key to ensuring that the Personal Accounts system is a success:
1) Firm foundations
If people on very low incomes are going to save into a long term pension scheme to improve their income in retirement they need to feel confident about what the level of their income from the state will be and not risk having their extra savings 'means tested away’ from them. The role of this basic state retirement pension (BSP) has arguably been undermined because it has not been adequately up-rated for many years, so that it falls well short of the amount that the state considers the minimum acceptable income, after housing costs and council tax have been paid. Over time, the proportion of households that will be eligible for Pension Credit will increase to about 80 per cent by 2050. This will have an increasingly deterrent effect on savings.
Today’s pensioners on low and moderate incomes can, as a result of the combined effect of means tested benefits, lose up to 91p in every £1 of their income from savings. Citizens Advice believes that the incomes of the poorest pensioners must keep pace with average earnings, without requiring an extension of means-testing that might undermine attempts to boost private retirement provision. Reduced reliance on means testing would provide some with an increased reward for saving more for retirement.
If Personal Accounts are to be a success individuals need an assurance from Government about the future level of the state pension and the treatment of any savings by the benefit system.
2) Employer engagement
We welcome the proposal for auto-enrolment into a national scheme, with the ability to opt out. If auto-enrolment is going to work people will need financial advice and support and great effort will be needed to engage employers.
Citizens Advice advises on many employment problems each year including those where employers have avoided their responsibilities such as to provide paid holidays, to provide decent pay or comply with regulations on working time. We therefore envisage a significant challenge in engaging employers in Personal Accounts, especially where low income workers are involved. We fear that some employers may exert pressure on their employees to opt-out of auto-enrolment in return for a shorter term gain such as a pay rise or bonus. Some workers, especially those on lower salaries, will find this 'money now' proposition more appealing than the ‘money later’ option of contributions into a Personal Account.
Citizens Advice welcomes the fact that employers will have certain duties which the Pensions Regulator will be able to secure compliance with. Citizens Advice believes that these duties and powers would, however, benefit from greater clarity as to the extent of employers duties to ensure participation by job holders. In addition to having a duty to make arrangements for job holders to become active members of qualifying schemes employers must also, in our view, be under a duty not to take any steps designed to encourage job holders to cease to be a member of a scheme. This would enable the Pensions Regulator to take action where, for example, an employer had offered higher pay or other inducements to job holders who decided to opt out of any pension scheme. An amendment to clause 2, concerned with employer duties on continuity of membership by job holders, might achieve this.
3) Advice
Financial advice and education, for both employees and employers will be critical to help employers and employees to understand the options available and exercise an informed choice about Personal Accounts.
During the last 20 years, the whole area of personal finance has become more complex with an often bewildering array of issues and choices facing most people. Research in 2000 estimated that two thirds of us feel that financial matters are too complicated. This complexity can lead to people making wrong decisions or for many people, no decision at all.
A Financial Services Association (FSA) study in 2004 found that just over a quarter of all adults said that they did not think they were good at managing money, and one third said that they would prefer not to think about planning their finances at all. Research for Citizens Advice has found that twenty three per cent of people with credit and loans have no idea how much they owe. The FSA also found that the majority of people in the UK are not planning ahead sufficiently, and are likely to be storing up problems for the future. 39 per cent of people say they tend to live for today and let tomorrow take care of itself.
81 per cent of the pre-retired do not think a state pension will provide them with the standard of living they hope for in retirement. Nevertheless, 37 per cent of these people have not made any additional pension provision.
Individual advice on financial matters is important, and as important in our view for people who are financially excluded, and have less practical experience to draw on. It has been widely acknowledged that there is a gap in the provision of financial advice for people on low incomes. (In this context we distinguish between financial advice on choosing and using financial products such as insurance, savings or borrowing and money advice to deal with problem debts.)
Citizens Advice would like to move away from our traditional role of emergency help with debt to a more preventative role. Many CABx already have financial literacy projects. We feel that the provision of free generic financial advice to low and middle income groups would assist consumers to be more confident with their finances.
Citizens Advice warmly welcomes the initiative by Government to ask Otto Thoreson to produce a framework for delivery of a generic financial advice service or network for the United Kingdom. The Interim Report published in the autumn paints an exciting vision of a service which will be available for all consumers to help them with impartial and non-judgemental advice on their personal finances, including related topics like tax and benefits – helping people to make informed decisions about their personal financial situation and plan for the future. The proposed service, very importantly, will not try to sell consumers any products. The kind of service described by Otto Thoreson in his interim report will be essential to underpin the introduction of personal accounts and, more generally, to help consumers change their behaviour from a culture of borrowing and spending to saving and planning ahead for the future. Citizens Advice very much hopes the new service will come to fruition.
Parliamentary Officer: Bethan Collins Parliamentary
Social Policy Contact: Vicky Pearlman Vicky Pearlman
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