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Monday, 25 September, 2000, 21:30 GMT 22:30 UK
What is pension credit?
Brown at conference
Gordon Brown: Targeting money to the needy
By the BBC's Andrew Verity

The pension credit is a new state benefit meant to appease critics of Labour's pension policy.

The private pensions industry has accused Labour of creating a big disincentive against taking out private pensions.

Sales of personal pensions have dropped sharply since Labour came to power.

The critics say that one reason is the Minimum Income Guarantee, the means-tested top-up aimed at the poorest pensioners.

Wasted pension saving

At the moment, the Basic State Pension pays 67.50 a week to single pensioners.

If they have no income other than that, they can get an extra 10.95 by applying for the Minimum Income Guarantee (MIG), which tops the pension up to 78.45.

But take another pensioner who's saved enough to receive 11 a week of private pension.

This person would not be entitled to the means-tested MIG, because their income would already be above the 78.45 minimum.

Now to get 11 a week from a private pension, they would need to have saved more than 10,000 into a private pension fund.

Disincentive

But the income is the same as if they had never saved, so the 10,000 is wasted: they might as well not have bothered saving at all.

For every 1 of pension income they saved so hard to get, they lose 1 in the MIG benefit.

Further, the MIG always rises faster than the Basic State Pension, which goes up only with retail price inflation.

So the gap between the two grows over the years - and so does the amount of private pension saving that would be wasted.

The bigger the gap, the less worthwhile it is to save into a private pension.

The Chancellor's concession

In his speech to the Labour conference, Gordon Brown confirmed that the Minimum Income Guarantee would rise from 78.45 to 90, so no pensioner should have to live on less than 90 a week.

But this would also mean the gap between the state pension and the MIG would be bigger.

Potentially a pensioner could save up to 20,000, generating a private pension income of around 20 a week, without gaining anything.

Put another way, the first 20,000 of any private pension saving might be wasted.

The pension credit

Instead of doing away with the MIG and raising the basic state pension - which would not target the poorest pensioners - the Government is bringing in a new pension credit.

This is designed to reward private pension saving rather than punishing it under the means test.

The purpose of the credit is to remove the disincentive to save caused by the Minimum Income Guarantee.

Right now, the disincentive removes 1 of MIG benefit for every 1 of private pension income.

Under the pension credit, private pensions would be taken into account, so less of the MIG benefit would be lost.

For every 1 of private income pensioners might only lose, say, 50p of benefit.

Details of the credit are still to be finalised but it will not kick in until 2003.

Stephen Cameron, a pensions expert at life insurer Scottish Equitable, said: "The delay does create some uncertainty in the sense that the credit will only come in if Labour is re-elected."

Gordon Brown has said there will be transitional arrangements to prevent people being put off saving into a private pension between now and 2003.

But some in the industry fear this will add yet another layer of complexity to a pension system that's already too complicated.

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25 Sep 00 | Labour
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