You may or may not be aware that the Labour Government introduced a means tested benefit for pensioners called the Minimum Income Guarantee (MIG). This means that if at retirement, your income is below certain thresholds then you may receive an increase in payments subject to a means test where they look at other assets that you own.
However, if you have taken responsibility yourself and saved for your retirement in either a personal or company pension scheme, then you will receive higher income and may not necessarily be entitled to MIG or indeed have it reduced. Thus rendering the need to have your own pension scheme worthless.
This is not and does not encourage people to save for their own retirement.
Credit Where Credit Is Due - New State Pension Credits - The Government where obviously concerned that they were penalising those who are saving for their own future and do not want these people to lose out. With this in mind they have finally unveiled their plans for the State Pension Credit.
In simple terms, with effect April 2003, you will receive a credit of 60p in the pound for assets and savings that you have, which previously would be used to reduce any benefits you may have been entitled to. Looking at todays rates for a single pensioner: The State pension is £72.50 per week.
The minimum income guarantee is £19.65 which takes this up to £92.15 per week. For savings in excess of £6,000 the notional income will be deemed as 10%. For example, if a person had £10,000 in the bank, this is £4,000 above the notional limit and at 10% income would be £400 per annum - this is £7.69 per week. Credit is then given for 60p for each pound - i.e. 40p is countable - in this case £3.08 per week would be deemed as income and MIG would be reduced accordingly.
In doing the Maths, this means that if you hold assets and savings worth £55,125 plus then this would wipe out any claim you would have for State Pension Credit up to the MIG of £19.65 per week.
From an income from a private or company pension, this is also likely to be the same. If you have a pension of £100 per week, then you will receive a credit for 60p in the pound. This is clearly aimed at modest and lower earners to encourage people to save rather than higher earners with larger pensions.In simple terms, for medium and lower earners, you will not be penalised as much by having your benefits reduced if you have made modest savings in pension plans.
For more on retirement visit Pensions Adviser.com or visit our site Stakeholder Cafe.com for new, low charging Stakeholder Pensions.