From: sufaud@hotmail.com (Sufaud)
Newsgroups: uk.finance
Subject: Obs: 60 per cent of earners are throwing money away by saving for retirement
Date: 26 Sep 2004 00:34:10 -0700

'Stealth tax' on pensions

Thanks to means testing, 60 per cent of earners are throwing money
away by saving for retirement
Neasa MacErlean and Maria Scott

Sunday September 26, 2004
The Observer

Millions of people may receive only minimal benefits from their
private pensions because of the government's state pension regime,
according to experts.

On the eve of the Labour conference, calculations provided to The
Observer have convinced pensions experts and charities for the elderly
that the government's means-tested pension system, designed by Gordon
Brown, is eroding the value of saving for retirement.

Christine Farnish, chief executive of the National Association of
Pension Funds, said company pension schemes were already starting to
question the value of signing up lower income workers to their
schemes. The scheme managers feared workers might be wasting their
money.

'It is [also] impacting on insurance companies. They don't touch
businesses where there are people on low incomes. It is partly
economics and partly because of the risk that someone will say in 20
years' time that they were mis-selling.'

The problem arises from the way small incomes are treated under the
state system. Means testing will top up the basic state pension, which
is just £79.60 a week for a single person. Last year, the government
introduced a new form of pension means-testing offering extra state
assistance, beyond that paid to people with no private savings to
those with modest savings. But experts believe the policy is
backfiring. This is because the extra income may be minimal and the
state's top-up benefit is withdrawn on a sliding scale of between 40
and 100 per cent. This is equivalent to taxing pensioners' savings at
those rates.

To achieve a private pension income that is free of all means testing,
savers today would have to retire with a pension fund of at least
£75,000. The average fund is worth only £24,000.

According to projections for The Observer by actuaries Mercer, someone
in their early 20s would need to start saving at a rate of £280 a
month to build a fund big enough to escape means-testing. Alison
O'Connell, director of the pensions think tank the Pensions Policy
Institute, said: 'It is a real barrier to saving.'

Mervyn Kohler, of charity Help the Aged, said: 'If you are not in the
top 40 per cent of earnings, you are probably wasting your time
putting your money into pensions savings if present policies
continue.'

Means-testing has been expanded dramatically under Gordon Brown, who
sees it as the best way to target state resources at the most needy.
But a succession of organisations, from the Confederation of British
Industry to the two main opposition parties believe that means-testing
is threatening to undermine the entire pension system by discouraging
private saving and increasing the cost of state assistance for the
elderly.

The Institute for Fiscal Studies has already calculated that more than
80 per cent of pensioners will be receiving means-tested pension
payments by 2025.

O'Connell said that it was virtually impossible for financial advisers
to categorically recommend private pension saving.

'They can't unambiguously say "save in a pension, it will be good for
you",' he said.


http://observer.guardian.co.uk/business/story/0,6903,1312653,00.html