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

A single-tier pension: what does it really mean?
Box 5.2. Effect of the single-tier pension and abolition of pension credit
savings credit on James’s income in retirement
The following example describes a hypothetical individual, James, born in
1986. As described in Box 5.1, he accrues 45 years of credits to the BSP (or the
single-tier pension) through self-employment.
Under the current pension system, James’s state pension income at SPA will be
£109 per week. James has saved into a private pension and he expects to receive
£25 a week of income from these savings. James receives £7 of PCGC and £2 of
PCSC. For every additional £1 of private saving, he has £1 of PCGC withdrawn,
but he gets an extra 60p of PCSC, giving him some incentive to save privately.
Under the single-tier pension system, James’s state pension income at SPA
would instead be £146.30, and his private pension income would take him well
above the PCGC level. He would receive no top-up to his income from the PCGC
(the PCSC would no longer exist). His marginal incentive to save into a private
pension would therefore be improved: instead of 60p of extra income from each
extra £1 of saved income, James would expect to keep all of the additional
income. (However, the higher level of state pension income he expects to get
under the single-tier system may decrease his incentive to save privately.)
Box 5.3. Effect of the single-tier pension on Zach’s income in retirement
The following example describes a hypothetical individual, Zach, born in 1986.
As described in Box 5.1, he accrues 30 years of credits to the BSP and S2P (or
the single-tier pension) through earnings.
Under the current pension system, Zach’s state pension income at SPA will be
£156.80 per week, taking him just over the maximum income threshold for
PCSC eligibility. He will therefore expect to keep any income he receives from
his private pension saving – none of it will be withdrawn through means-tested
benefits.
Under the single-tier pension system, as Zach has only 30 years of entitlement,
his single-tier pension entitlement of £125.40 will fall below the level of the
PCGC. He will have his income topped up by the government to the PCGC level
of £141.10. However, for each £1 of income that he receives from his private
savings, he will face the withdrawal of £1 of his PCGC entitlement. He therefore
will have no incentive to save privately for retirement.
The above discussion implicitly assumes that all those who would be eligible for
PC would take it up. In reality, take-up is not 100%; DWP estimates that, although
in 2009–10 between 73% and 80% of those eligible for pension credit guarantee
credit actually claimed it, only 43–48% of those eligible for the savings credit
claimed it. 65 For individuals who might qualify for PCSC but do not intend to take
65 Department for Work and Pensions, 2013f.
60