Pensions

Work and Pensions written question – answered on 5th March 2007.

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Photo of Philip Hammond Philip Hammond Shadow Secretary of State for Work and Pensions

To ask the Secretary of State for Work and Pensions if he will estimate how many pensioner benefit units in 2050 will face (a) a 100 per cent. marginal rate of pension credit withdrawal if the White Paper reforms are implemented and (b) a 40 per cent. marginal withdrawal rate if they are not.

Photo of James Purnell James Purnell Minister of State (Pensions Reform), Department for Work and Pensions

The proposed reforms to state pensions will provide a solid foundation for private saving, both by limiting the spread of pension credit entitlement and by delivering simpler and more predictable state pension outcomes. Under the proposed reforms, by 2050 just one in 50 pensioners will receive the guarantee credit only when they first reach state pension age. Even then, we would expect many to be able to reduce the interaction between additional private saving and benefit entitlement by taking some or all of their private pension income as a lump sum. Those with private savings of less than £15,000 can take them as a lump sum under the trivial commutation rules.

It cannot be assumed that all those with 100 per cent. marginal deduction rates are in receipt of the guarantee credit only. People on both guarantee credit and savings credit who qualify for additional amounts because they are severely disabled or a carer or have certain housing costs and are on the savings credit maximum will also have 100 per cent. marginal deduction rates.

Numbers and proportions of pensioner benefit units in 2050 that will face (a) a 100 per cent. marginal rate of pension credit withdrawal if the Pensions Bill reforms are implemented and (b) a 40 per cent. marginal withdrawal rate if they are not are as follows.

Without reform Pensions Bill reforms
40 per cent. marginal deduction rates: current system standard guarantee credit uprated by earnings 100 per cent. marginal deduction rates: Pensions Bill reforms
Number of pensioner households in 2050 9,050,000 650,000
Proportion of pensioner households in 2050 75 6
Notes: 1. The analysis is based on the reform proposals presented in the Pensions Bill rather than the White Paper. Some methodological improvements were made to the projections of pension credit eligibility between publication of the White Paper and the introduction of the Pensions Bill. 2. Estimates of the number of pensioner households eligible for pension credit are taken from the DWP dynamic micro-simulation model PENSIM2. Modelling of the reform proposals does not include any increase in private saving from the introduction of personal accounts, which would reduce the numbers eligible for pension credit. 3. The marginal deduction rate reflects the extent to which a marginal increase in gross income would result in a change in net income, assuming this is fully taken into account for pension credit entitlement. The deduction rate shown would not apply to all changes in income—for example where additional pension savings are taken as a lump sum. 4. Care should be taken when interpreting these projections as they are subject to a margin of uncertainty. The projections are based on long run simulations of the incomes of individuals under a set of assumptions including life expectancy, partnership formation, earnings growth, employment rates, state and private pension accumulation. 5. Projections of the number of pensioner households eligible for pension credit are derived from the projected proportions eligible and projections of the number of pensioner households in Great Britain. 6. Estimates cover all those aged above women's state pension age in the private household population of Great Britain. 7. Estimates account for equalisation of state pension age between 2010 and 2020. They also account for the proposed further increases in state pension age described in the Pensions Bill. The estimates assume that the minimum age at which people can claim pension credit rises in line with women's state pension age. 8. Projections under the Pensions Bill proposals assume: continued earnings uprating of the standard guarantee credit; the savings credit maximum is uprated by earnings from 2008 and then by prices from 2015; earnings uprating of the basic state pension from 2012; and measures to improve coverage of state pensions described in the Pensions Bill. Figures exclude the effect of personal accounts. 9. Projections under the current system with guarantee credit earnings uprated assume: continued earnings uprating of the standard minimum guarantee; continued price uprating of the savings credit threshold and the basic state pension. 10. The total number of pensioner households under the Pensions Bill reforms is lower than the total number under the current system because of the phased increase in the state pension age starting in 2024 Source: DWP microsimulation modelling.

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