A single-tier pension: what does it really mean? - The Institute For ...

A single-tier pension: what does it really mean?
would go from facing the slope of the solid black line to facing the 100%
withdrawal rate corresponding to the dashed grey line.
2. Those who expect to have income above the PCGC level but below the
maximum threshold for PCSC eligibility (for example, those with income at B)
will face a lower marginal withdrawal rate if PCSC is abolished. Instead of
facing a 40% withdrawal rate, these people would not be entitled to any PCSC
income at all and so would not face any withdrawal of PCSC. 64
Those above the PCSC upper threshold will still face withdrawal rates of 0%, and
those below the PCSC lower threshold will still face 100% withdrawal rates.
Marginal incentives to save privately for retirement would be decreased for
group 1 and increased for group 2. Whether or not an individual expects to be in
one of these groups will depend not only on their state pension income but also
on any other private resources they have. However, for illustrative purposes,
Figure 5.5 shows – for individuals who only have state pension income – how
many years of contributions they would need to have under the current and
proposed state pension systems in order to fall into one or other (or neither) of
these groups. It takes the example of a single low earner born in 1986. Since, as
mentioned above, under the current system state pension income declines
relative to the PC thresholds over time, it is important to think not only about
individuals’ circumstances at SPA but also their circumstances later in
retirement. Figure 5.5 therefore shows not only which group an individual would
fall into at SPA but also which group they would be in at age 80.
Panel A of Figure 5.5 shows that, at SPA, single individuals with 26 or 27 years of
contributions would fall into group 1. Those with 28 or 29 years of contributions
would fall into group 2. Panel B shows that this person would need 38 years of
contributions to ensure they remained outside PCSC eligibility at the age of 80.
Those with fewer than 27 years of contributions would be unaffected by the
abolition of PCSC – facing a 100% withdrawal rate both with and without the
PCSC. As the SPA rises, labour force attachment increases and growing numbers
are credited with state pension entitlement for unpaid activities, the size of the
groups affected by PCSC will fall to zero.
Eligibility for pension credit therefore looks rather similar under the current and
proposed systems. Under current legislation, eligibility for PC extends further up
the income distribution (because of PCSC) but state pension incomes would be
higher for a given number of years of contributions. Meanwhile, under the
proposed system, state pension income would be lower but eligibility for PC
would cease at a lower level of income.
64 Note that this withdrawal rate may not affect their overall marginal effective tax rate, as they
may be facing withdrawal of their housing benefit income or support for council tax.
58