The Saving Gateway and the Child Trust Fund: Is asset-based welfare 'well fair'?

The 2001 Labour Party manifesto committed the government to introducing a 'Child Trust Fund' and a 'Saving Gateway' in the current parliament. This Commentary assesses these two policy proposals. It looks for possible rationales behind the government's plans for some form of asset-based welfare. It provides a discussion of many of the issues important to the design of the Child Trust Fund and the Saving Gateway. It also presents new evidence on the characteristics, incomes and savings of lower-income groups who might be eligible for the Saving Gateway

Two cheers for the Pension Credit?

On 6 October 2003, the pension credit replaced the minimum income guarantee as the principal means-tested benefit for families containing an individual aged 60 or over. This Briefing Note examines the impact of this reform. A finding is that with regards to the government's objectives of giving more resources to low- to middle-income pensioners, rewarding pensioners for having saved in the past and encouraging people of working age to save for the future, the pension credit is likely to achieve the first two but not the third. This Briefing Note is set out as follows. Section 2 describes how the pension credit operates and why the problems that occurred with the Inland Revenue's administration of the new tax credits for families with children in April 2003 should not occur with the pension credit. The distributional impact of the reform is shown in Section 3. Section 4 discusses the inevitable problem of incomplete take-up of the new payment. Section 5 discusses the likely impact of the pension credit on saving and Section 6 discusses some of the longer-term issues that it raises. Section 7 concludes

Achieving simplicity, security and choice in retirement? An assessment of the government's proposed pensions reforms

On 17 December 2002, the government published a Department for Work and Pensions Green Paper about working and saving for retirementұ and a set of Inland Revenue proposals for reforms to the tax treatment of private pensions.2 Of the options explored in the two papers, it is claimed that Ѵhese proposals for better information, simpler pensions, simplified tax treatment, better protection and more flexible retirement are designed to enable people to make their own choices for retirement' (DWP Green Paper, Summary, 66, 10). The perceived need for yet more reforms to the UK pension system seems to stem from the governmentҳ belief that Ѱerhaps 3 million people are seriously under-saving (or planning to retire too soon)' and that ѡ further group of between 5 and 10 million people may want to consider saving more or working longer' (DWP Green Paper, 3, 16, 36). In this Briefing Note, we discuss whether or not the proposed reforms are likely to help individuals to make choices about how to provide for their retirement that are appropriate to their circumstances. We focus particularly on whether or not the proposals might prompt those individuals who are not thought to be providing sufficiently for their retirement to save more each year or to retire at an older age than might otherwise have been the case. This would help alleviate concerns about underprovision. The structure of our discussion is as follows. Section 2 describes the main proposed reforms. Section 3 discusses whether they are likely help individuals to make saving decisions that are appropriate to their circumstances. Section 4 looks at how the reforms might affect retirement ages. Section 5 concludes

Interim evaluation of saving gateway 2

The Saving Gateway is a government initiative aimed at encouraging savings behaviour among people who do not usually save. Each pound placed into a Saving Gateway account is matched by the government at a certain rate and up to a monthly contribution limit. Matching provides a transparent and understandable incentive for eligible individuals to place funds in an account. An initial pilot of the Saving Gateway - SG1 - has already been conducted and evaluated. In the December 2004 Pre-Budget Report, the Chancellor of the Exchequer announced a new, larger scale, pilot of the Saving Gateway - SG2. Almost 21,500 individuals have opened SG2 accounts across six areas of England. The design of these accounts - in terms of the match rate and monthly contribution limit - varies across these areas. Alongside the financial incentive to place funds in a SG2 account, the pilots also offer financial education

Tax reform and retirement saving incentives: evidence from the introduction of stakeholder pensions in the UK

Faced with ageing populations, OECD governments are seeking policies to increase individual retirement saving. In April 2001, the UK government introduced Stakeholder Pensions – a low cost retirement saving vehicle. The reform also changed the structure of tax-relieved contribution ceilings, increasing their generosity for lower earning individuals. We examine the impact of these changes on private pension coverage and on contributions to personal pension accounts using individual level micro data. We use a difference-in-differences strategy, and where necessary our estimator is modified to allow for dichotomous outcomes. The results suggest that the change to the contribution ceilings affected both coverage rates and contributions to private pensions among lower earnings individuals, especially among women, and those in couples

The importance of incentives in influencing private retirement saving: known knowns and known unknowns

We summarise what economic theory predicts about how retirement savings decisions are affected by marginal withdrawal rates created by the tax, tax credit and benefit system, and by the information individuals are provided with. All these predictions vary across individuals with their circumstances. In documenting the incentives to save in a private pension provided by the tax, tax credit and benefit system we show that some individuals face a very strong incentive to place funds in a private pension at particular times during their working lives. Those who are basic rate taxpayers who expect to become higher rate taxpayers or move onto the taper of the Working Tax Credit have an incentive to delay making any private pension contributions until that time, while those expecting to move off that taper have an incentive to bring forward future pension contributions. When examining retirement saving it is important to consider both saving decisions and also the choice of retirement age. We cite previous evidence that both of these margins have been adjusted by individuals in the light of changed financial incentives. In particular there is evidence that spending by working age individuals was increased in the light of the introduction of the State Earnings-Related Pension Scheme. In addition evidence from West Germany and the United States shows that individuals' retirement ages can be affected substantially by changing financial incentives. There is less evidence of reduced spending by working age individuals in the light of the decision to index the Basic State Pension in line with prices rather than the greater of prices or earnings. New evidence from the English Longitudinal Study of Ageing shows that it is low and high wealth individuals who are most likely to be out of the labour market prior to the State Pension Age, though often for very different stated reasons. This suggests that if retirement incomes of those with low wealth are to be increased then increased labour market participation is perhaps a margin for them to adjust. Incentives to work and save are potentially affected by two recent UK reforms: the introduction of the two new tax credits (Working Tax Credit and Child Tax Credit) and the introduction of the Pension Credit. We present some preliminary evidence on whether the strong incentive to contribute to a private pension provided by the two new tax credits has boosted private pension participation, the results of which are somewhat inconclusive and are worthy of further research. Examining the distribution of current pensioner incomes with respect to the incentives induced by the Pension Credit reform we find that many single pensioners will see an unambiguous increase in the incentive to increase their private retirement income -- for example through increased saving or later retirement. There are still large numbers of single pensioners who see a reduction in the incentive to increase their retirement income, the majority of whom have private income which they might decide to reduce. Fewer individuals in pensioner couples are eligible for the Pension Credit. Despite this we find that a similar proportion faces a reduced incentive to acquire greater income as we did for single pensioners. If the expectations of individuals do not reflect the current rules of the system, then we cannot expect to observe responses fully in line with economic theory that is predicated on full information. Recent evidence from the English Longitudinal Study of Ageing suggests that on average individuals underestimate their longevity and overestimate the private pension income that they can expect to receive. On the other hand, expectations of being in paid employment at older ages are, on average, similar to the current proportions of older individuals who are in paid work and individuals' expectations of remaining in the labour market at older ages appear to square up with the marginal financial incentives to remain in work that are created by different types of pension scheme

Pension and saving policy

This Election Briefing Note aims to describe the key differences between the three main UK political parties on policies that might affect the ways in which individuals save and provide for the future, including the ways in which resources might be provided for retirement. Our main focus will be on policies that might affect future pensioners; IFS Election Briefing Note no. 11 explains how the different tax and benefit reform packages proposed by the different parties will affect people in the population in the short term, including current pensioners. We will also focus on areas in which the different parties have different policies

Ill-health and retirement in Britain: a panel data-based analysis

We examine the role of ill-health in retirement decisions in Britain, using the first eight waves of the British Household Panel Survey (1991-98). As self-reported health status is likely to be endogenous to the retirement decision, we instrument self-reported health by a constructed ‘health stock’ measure using a set of health indicator variables and personal characteristics, as suggested by Bound et al (1999). Using both linear and non-linear fixed effects estimators, we show that adverse individual health shocks are an important predictor of individual retirement behaviour. We compare the impact of our constructed health measure on economic activity with that arising from the use of other health variables in the data set. We also examine the impact of the 1995 reform of disability benefits on the retirement decision

Pensioner poverty over the next decade: what role for tax and benefit reform?

Recent falls in poverty amongst those aged 65 and over are unlikely to continue after 2007-08, even after the implementation of the proposals outlined in the Government's Pensions White Paper. This report looks at the prospects for pensioner poverty in England over the next decade. The authors find that that the proportion of those aged 65 and over living in poverty is set to remain at its current level - around one-in-five - between 2007-08 and 2017-18. This is despite the overall increase in the generosity of state pensions arising from the Pensions White Paper, and the fact that younger cohorts are expected to have more private pension income and higher employment rates at older ages than those preceding them