We welcome the government’s recognition of the need for financial security for older people. The current situation is unacceptable. The government’s own figures show that 25% of pensioners live below the official poverty line, and 17% have done so for 3 of the previous 4 years.
We agree that there needs to be a mix of state and private provision in order to provide people of pension age with a decent income. We also strongly support the government’s intention to simplify the rules and tax treatment applying to pensions, and we consider that this simplification should apply to both state and private pensions. But we are very disappointed that the green paper fails to address properly the foundation that the state needs to provide in this field. In particular, the government must recognise that the widespread application of means testing to older people has a significant impact on the environment in which people make decisions about financial provision for their retirement.
State Provision
There is a long history of state provision of a contributory, non-means tested basic pension. The role of this basic state retirement pension (BSP) has been undermined because it has been inadequately up-rated for many years so that it falls well short of the amount (the minimum income guarantee or MIG) that the state considers the minimum acceptable income, after housing costs and council tax have been paid. Nonetheless, the Green Paper says that the basic state retirement pension “will continue to be the foundation for income in retirement.” Despite the growth of other pensions, the basic state pension still provides the main basis of many older people’s incomes, and continues to be regarded by pensioners as a right that should ensure them a decent standard of living in retirement.
In practice, the inadequate level of BSP has meant that very large numbers of pensioners need to submit to a means test if they are to obtain all the state financial support to which they are entitled. 1.77 million (24%) of pensioner households currently receive the MIG. Up to a further 600,000 households would qualify for MIG if they claimed it. Many pensioner households also receive other means tested benefits for example – housing benefit (1.8 million), and council tax benefit (2.5 million). DWP estimate that 50% of pensioners will be entitled to means tested pension credit when it is introduced.
On present policies this percentage is set to rise considerably. The government has said that it will increase the basic state pension by at least 2.5% a year, even if the Retail Price Index is below this. On this basis, the DWP projection shows entitlement to pension credit rising to 65% in 2050 (although the Institute for Fiscal Studies think the figure will be 82% by 2050).
Currently, pensioners miss out on huge amounts of benefits to which they are entitled because they fail to claim them. A recent NAO report (“Tackling Pensioner Poverty: Encouraging Take-up of Entitlements” HC 37 Session 2003-2003: 20 November 2002) said that between 22% and 36% of pensioners entitled to MIG did not claim it in 1999-2000. Evidence from CABx shows that many older people fail to claim benefits either because they do not realise that they may be entitled, or because they find it demeaning to have to submit to a means test:
- In Manchester a couple, both in their 80s, who made cautious enquiries at the CAB because of their low income. The bureau calculated that they were entitled to Minimum Income Guarantee, but the couple declined to apply on the grounds that they did not want to accept ‘charity’, and that they had reservations about the application procedure.
- In East Sussex a woman aged 81, a wheelchair user, was living with her son aged 60, who had learning difficulties. The woman client was receiving a Retirement Pension of £13 per week, and her son an occupational pension of £4 per week. They had been living off capital of £5000 which had reduced to £2000. The clients had not claimed Income Support or other benefits.
- A Hertfordshire couple, both over pension age, were living on the basic state pension, reduced because of a partial contribution record, giving them a joint income of £83 per week. They called at the CAB to ask about home income schemes, and were advised to claim Minimum Income Guarantee and council tax benefit, as they were losing out on almost £120 per week. The clients were completely unaware that they could claim these benefits, and had been living in poverty for some time.
- In London a man aged 72 living on the basic Retirement Pension. The client lived in his own home but was paying full council tax. In addition he had a skin complaint which resulted in numerous care needs which were being met by his daughter, a single parent. The CAB advised the client to claim Minimum Income Guarantee, as well as council tax benefit and attendance allowance.
A state pension policy that relies on such extensive means testing is profoundly unsatisfactory. Older people will resent the inadequacy of a basic state pension which the state itself recognises does not meet their basic needs, so that they have to subject themselves to a means test. The policy cannot be sustainable in the longer term to which the green paper is addressed.
The current arrangements also provide a disincentive towards saving for retirement, since any occupational or other private pension payment between BSP and MIG is fully taken into account in deciding the level of a MIG award, if any. From April this gap is £32.00 per week for couples and £24.65 for single people, based on a single person’s full BSP. Since the average occupational pension is only £86.20 per week, many people are seeing no benefit, or a hugely reduced benefit from years of payments into a private or occupational pension scheme.
The new pension credit, which will apply from October 2003, is an attempt to address this problem for people aged 65 and above. The scheme will be advantageous to most people with occupational, private or additional state pensions up to £52 a week for a single person or £80 a week for a couple. People with additional pensions above these levels will get no benefit from pension credit unless they are severely disabled, look after a person who is severely disabled, or get help with mortgage interest payments. The benefits of the new scheme will be lower for pensioners who do not qualify for a full BSP, or for couples whose individual BSP’s total to more than the full BSP for a couple.
Second Tier State Pension
For over 40 years the state has been trying to provide a second tier state pension to provide a further pension more closely related to recipients’ previous earnings. There have been 3 schemes, all of them unfunded, pay-as-you-go schemes:
- Graduated Retirement Scheme (1961-1975). Maximum weekly pension - £8.06 for men and £6.75 for women.
- SERPS (1978-2000). Maximum weekly payment for a single person is £138. SERPS benefits have been substantially reduced since the scheme was started. This has caused widespread scepticism about the reliability of any pensions promise made by the state.
- State Second Pension (S2P) which started in 2002. S2P is more redistributive than SERPS, and also credits contributions to some carers and people with a long-term illness or disability.
SERPS and S2P both have contracting out options. It can be a very complicated decision whether it is in the interests of a particular individual whether to stay in or contract out of S2P.
A State Pension Guarantee
If people are to be able to plan sensibly for their retirement, they need to know what financial support the state will provide. Today’s pensioners have been short-changed by the failure of successive governments to maintain a decent value for the basic state pension. The erosion of SERPS benefits and the sheer difficulty of evaluating contracting out options have left many people unclear and wary about what second tier state pensions actually have to offer them. This history has gravely damaged the credibility of state pensions and a very clear statement about future intentions is needed to restore confidence in what the state provides. To be taken seriously the statement will need to be endorsed by all political parties to make it clear that the commitment to the future financial well being of pensioners will not be abandoned by a future government at the first hint of financial hard times. Sadly the Green Paper fails to give any such certainty about the state’s commitment to a decent universal pension.
We consider that the whole pensions system should be underpinned by a State Pension Guarantee. This needs to be set at a level that means that the overwhelming majority of pensioners will know that they can rely on a basic pension from the state that will keep them out of poverty, without the need for means testing. This State Pension Guarantee should be set at the proposed level of the basic Pension Credit, and should be up-rated in line with growth in earnings.
Are the Contribution Rules Fair?
The Green Paper points out that many women currently qualify for much less than the full basic state pension because they have incomplete National Insurance Contribution records. This accounts for much pensioner poverty.
CABx have provided many examples of the complexity and unfairness of the present rules based on a person’s record of National Insurance contributions:
- In Essex, a woman of pension age had worked until 1975 paying married woman’s reduced NI. She then cared for her children until 1988. From 1988 she worked and paid full National Insurance. She is receiving a much reduced pension because of her time paying reduced National Insurance and caring for her children. The Inland Revenue refused to allow home responsibility protection for 1978 and1979 because the client had not revoked her election to pay married women’s rate of National Insurance. However, they did allow it from1980 as married women’s rate generally ended then.
- In Hampshire, a retired woman was having great difficulty in getting an explanation of how much state retirement pension she was entitled to on basis of her national insurance contribution record. Her local CAB pursued the matter and received a reply from the Inland Revenue that the CAB described as “full of jargon and completely incomprehensible.”
- A CAB in Warwickshire saw a woman aged 64,whose husband is 58. Having brought up their 4 children, she has an insufficient National Insurance contribution record to qualify for any state retirement pension in her own right. She must wait until her husband reaches 65, and she is 71, before she will receive a pension. She feels that this is very unfair when she has devoted so much time to bringing up her family.
- In Nottinghamshire, a CAB’s female client was very upset to discover that her SERPS pension is not transferable to her male partner if she dies. She feels that this is discrimination against unmarried couples.
We question whether the existing approach to a contributory basic state pension is appropriate for the modern world. Although the increased female employment rates will improve women’s state retirement pensions in future (as will the effect of home responsibilities protection), other features of the modern world work in the opposite direction. Far more couples are divorcing, far more couples live together without marrying, and far more people are living abroad for part of their working life. The present National Insurance Contribution rules to qualify for the basic state pension are ridiculously complex and are ill suited to cope with these changes. We consider that the time has come for the State Pension Guarantee to be based on a simplified long term residency qualification, for example, 20 years residence in the UK immediately before claiming the guarantee, proved by payment of tax or receipt of state benefits. This would greatly simplify the administration of pensions, and would give the almost all people of pension age entitlement, doing away with most means testing.
Disabled Pensioners and their Carers
An important aim of the State Pension Guarantee is to provide older people with a decent standard of life. One important factor in this will be whether life is made harder and more expensive by disability. The payment of Attendance Allowance to disabled older people already recognises the need for extra financial support for disabled people. But the present arrangements have three major failings:
- Too few people know about AA. Take-up is only 40 to 60%.
- Older people suffer discrimination because AA, unlike Disability Living Allowance for people of working age, has no provision to help with mobility costs.
- No help is provided with extra daily living costs, such as help with cleaning and shopping, although these are huge problems for many older people.
We consider that AA should be enhanced to cover these omissions and should be mainstreamed as part of the State Pension Guarantee, so that all recipients of a basic state pension would be regularly reminded that they could apply to have their pension enhanced in the light of extra needs.
Alternatively and more simply, but less well tied to needs, the State Pension Guarantee could be increased with the age of the pensioner by, say £3 per week for each year from the age of 75.
Much of the care for frail older people is provided by their families, often by spouses who are themselves of great age. Some financial recognition to carers is provided through Invalid Care Allowance (called Carer’s Benefit from April 2003), which pays carers on very low income £43.15 a week if they provide a disabled person with more than 35 hours of care a week. This benefit has only recently been extended to elderly carers, but for many of them this is of no financial benefit because of the overlapping benefit rules. Many CABx have reported how let down pensioners feel when they discover that the extension of ICA to older people provides no financial recognition for the work they are carrying out. Some examples are:
- In west London a woman, aged about 70, lives with and cares for her mother who is receiving Attendance Allowance. She applied for Invalid Care Allowance, was found eligible, but has received no money because she already has a state retirement pension of £120 per week, which is deemed to be an overlapping benefit.
- A 64 year old woman in south London applied for Invalid Care Allowance because she provides day and night care for her 92 year old mother. Because of her state retirement pension, she gets no payment of Invalid Care Allowance. If the client and her husband were getting the Minimum Income Guarantee, they would get a carers premium £25.10 per week, but their savings are too great for them to qualify.
- Another CAB client in Cumbria is in the same position. She is a 70 year old retired nurse, caring for her 98 year old mother. Again she misses out on Invalid Care Allowance and the carers premium because of her state and occupational pensions, and her capital of over £12,000.
- In Warwickshire, a 62 year old married woman is incurring substantial travel costs in a rural area to care for her adult daughter. Because she gets a state retirement pension of £45 per week, she is not entitled to any payment of Invalid Care Allowance.
Clients may be led to believe that they can improve their financial position by paying extra voluntary national insurance contributions, when the overlapping benefit rules mean they are wasting their money to do so. A 60 year old Suffolk woman, whose husband is the same age was advised in a letter from DWP just before her 60th birthday, that her state retirement pension would be £18 per week, but that she could increase it to £30 per week by paying £700 voluntary backdated national insurance contributions. She did this, only to discover that she was no better off because she was already receiving Invalid Care Allowance for looking after her disabled grandson, and the overlapping benefits rule applied. The local CAB is helping the client to seek the return of her £700.
What is needed is recognition that carers provide a vital service to society. They make enormous sacrifices in their own lives and save the state huge care costs. This should receive financial recognition. We consider that pensioners who provide significant amounts of care to someone else should receive an enhancement to their basic state pension equal to the rate of Carers Benefit.
Paying for the State Pension Guarantee
The proposal for a State Pension Guarantee will carry substantial costs since it will extend pensions at MIG level to the 77% of pensioner households that do not currently receive the MIG. Some of these are poor households who currently miss out because they fail to apply for the MIG, for whom the proposal will achieve better targeting. Beyond this the government will need to consider if the extra costs should fall on the whole population through extra taxation, on workers and employers through extension of a payroll tax such as national insurance, and/or on wealthier pensioners through changes to their income tax regime. The government will also need to consider the future of S2P in an environment where the basic state pension provides a basic non-means tested safety for almost all pensioners.
Private Pension Provision
The proposed State Pension Guarantee would provide a basic income safety net for all people of state pension age who meet the residence conditions, and would remove the great bulk of pensioners from means testing for their non-housing/council tax needs. It will not provide the standard of living in retirement to which many people will aspire, and this will leave an important role for occupational and personal pensions.
It is currently very difficult for even the financially literate to make sensible, well informed choices about private pension provision. Our proposals for a clear and simple state pension promise, through the State Pension Guarantee, will help to provide a sound foundation for people’s private pension planning, but it does not provide the whole answer. There is also a need for simplification of the rules applying to private pensions, and the tax treatment applied to them. We welcome the debate that the green paper and the Inland Revenue’s consultations are generating in these areas. We also wish to underline the importance of making better financial advice and information available to help people make sensible choices about the provisions they make to provide income in retirement.
The Need for Better Financial Advice and Information
Citizens Advice strongly agrees with the need for pensioners to have access to high quality independent financial advice. There is a general consensus that the United Kingdom faces a problem of financial literacy. In 1998 the Moser report (Improving Literacy and Numeracy: A fresh start) estimated that one adult in five in the UK is not functionally literate with far more – between 30% and 50% having problems with numeracy. Much of the present Government’s strategy for avoiding poverty amongst future pensioners rests on the take up of private provision. It seems likely that consumers with limited financial literacy skills will not be well placed to act as confident consumers choosing the most appropriate financial products to meet their needs in later life.
There are a variety of initiatives and projects in this area aimed at improving consumer education in schools and improving adult basic skills. A growing number of Citizens Advice Bureaux are also involved in developing financial literacy initiatives which improve the skills and confidence of the people and communities that the bureaux advice.
But there is limited strategic co-ordination, by Government, of this work and too many initiatives appear to be short term or one-offs. Such an approach will not be fully effective because consumers’ ability to be financially literate is constantly challenged by market developments which introduce new products that consumers are not familiar with. Thus the financial skills gap is a moving target. And the idea that financial service providers need to take financial literacy skills of consumers into account in the design and delivery of their services and products has yet to gain common acceptance. Citizens Advice has reported on these issues, and the consequences of poor financial literacy skills in a report published in 2001 Summing up : bridging the financial literacy divide.
CAB advisers report a pressing need for their clients to be able to obtain trustworthy, independent, affordable, and accessible financial advice. In many instances, this need becomes clear from the advice that CABx provide on personal debt and welfare benefits. The rapidly changing personal finance market means that effective debt advice may often necessitate an element of strategic financial advice, for example on the option of re-mortgaging as a way of solving debt and reducing costs in an individual case where there is equity in a mortgaged property, or how to identify cheaper life and other insurances.
On other occasions the need for financial advice is associated with a non-financial enquiry. For example, a marriage breakdown may result in an enquiry on divorce proceedings, child maintenance or child access procedures, but there may be a pressing but client-unidentified need for advice on how divorce will affect the need to provide for future pension income.
It would seem to us that investing in ensuring all consumers have access to financial advice to help with planning for their retirement is an important consideration if the Government’s strategy for pensions is going to succeed. Investment in advice and helping people with poor financial literacy skills could help many individuals to safeguard their futures which must surely be in the public interest. We see a significant need for the Financial Services Authority and Government to develop a strategy for meeting consumers’ needs for ready access to high quality independent, affordable financial advice. In this context ‘affordable’ must include free advice and information for consumers on low incomes who would be unable to afford the costs of advice provided by the market.
We are doubtful of the scope for a market for generic financial advice to develop (as indicated in the Green Paper) which would meet the needs of consumers on low incomes who need to plan for their retirement. This is because high quality fee charging services may not find this area of advice giving remunerative. Investment is likely to be needed to secure this.
A further issue concerns whether generic or specific advice is needed. Some commentators seems to see generic advice to moderate income groups as a simple, low cost option that involves giving straight forward advice which is appropriate in many cases – a sort of ‘one size fits all’ approach, for which limited knowledge is required by the adviser. We caution against this. Even generic advice on financial issues requires advisers to be able to give up to date information and where relevant advice on a wide range of financial issues including social security benefits, budgeting, tax credits, pensions, insurances, tax avoidance, savings, mortgages, and education costs. These issues can be complex, particularly as they can rarely be viewed in isolation from each other. Generic advisers need to have an up to date and reasonably comprehensive overview of the whole personal finance sector. This will require a range of skills, training, and support, which may only partially be met by new technological developments and solutions.
It is clear from our own experience of advising people on low incomes that generic information and advice needs to be supported by the availability of high quality specific advice in individual cases. Generic financial advice is not a panacea. The complexity of the personal finance sector together with the lack of consumer financial literary is such that a significant proportion of consumers need product specific advice.
We are currently reviewing the future role of the CAB service in providing, or facilitating the provision of generic financial advice. The FSA are assisting in this review through an independent research survey into the current role of CAB in providing advice on financial issues and also the attitudes to financial advice of both CAB staff and CAB clients. Our review has so far identified that the definition of generic financial advice needs to be clearly defined. It is mostly taken to mean non-product advice but this is not universally agreed. It will be important for government and regulatory agencies to work to a common definition.
Equity Withdrawal to Fund Pension Income
There seems to be consensus amongst financial commentators that future growth in house prices will see home homeowners using home equity to increase their retirement income. This raises two important points:
- it is essential that regulation properly protects homeowners against equity release schemes that may not be in their best interest;
- homeowners are increasingly using equity to consolidate unsecured debt. Some finance companies are very actively encouraging this with the result that some homeowners are building a cycle of growing consolidating unsecured debt, then building up more debt which is again consolidated and so on. It is essential homeowners are provided with advice and that there is appropriate regulation to ensure that any release of equity prior to retirement really is the best medium and long term option for them.
Conclusions
Citizens Advice Bureaux are well placed to observe the grossly unsatisfactory nature of the current pensions scene. The state’s excessive use of means testing results in many of the poorest people going without income to which they are entitled. It results in a very complicated system of benefits, and high effective tax rates for poor pensioners. And it provides a disincentive for people to save for their retirement. Whilst we fully agree that pensions need to involve both state and private provision, we consider that a basic State Pension Guarantee needs to be provided to every pensioner who meets a simple, near universal test of qualification. This will provide a sound foundation upon which additional private provision can be built. The lack of that sound foundation is the great weakness underlying the many good proposals in the green paper.
Our other major concern is that help and advice should be readily available to everyone to help them to make sensible financial plans for their retirement. Such help should not be limited to people with large sums of money to invest, and it should help people to take account of what the state will provide as well as what can be achieved through private provision.
Social Policy contact: Alan Barton Social.policy@citizensadvice.org.uk
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