What level of income is too low to make pension worthwhile

mancmum

I am looking for sources of information to prove that for some on a low paying into a money purchase or even occupational pension is not worth while.

I can find general sources - EOC and ABI saying that for some they are better relying on means tested benefits, but can find nothing that talks directly about at what salary this kicks in.

May be I should look to the the total pension pot that can be accrued?

I ask this on behalf of colleague who has decided that she cannot afford a pension at early 50's with limited entitlement to state pension because of caring (sick adult rather than child), mature studentship and not previously had a private pension to which to add.

Any help would be appreciated.

EdInvestor

At the moment pension credit provides an income of 115 pounds a week. Basic state pension is 84 pounds a week. S2P is earnings related.

So step one is to find out the lady's entitlement to the 2 state pensions.Note that she will be entitled to the full basic state pension with 30 years contributions if she retires after 2010, and credits are accrued for caring. If she is now working she should accrue entitlement to the state second pension S2P at a preferential rate as well.

https://www.thepensionservice.gov.uk for a forecast.

(Pension credit also gives entitlement to free council tax and housing benefit if renting.)

At current annuity rates she would need to save up a pot of 40,000 pounds to buy an annuity to make up the gap of c.31 pounds a week to make up the gap between pension credit and BSP (assuming the annuity she bought at age 65 was index linked for RPI inflation, was single life and had no guarantee period).

Let's say she's 52 and she plans to retire at age 65.If 175 pounds a month went into a pension pot for the period, and it grew at 6.5% net of charges, she should end up with 42,377.Some of this money might be tax relief ( which would not be repayable later as her income would be under the age allowance, so a tax free pension) and some might come from her employer.

Much will depend on her likely entitlement to the 2 state pensions. She may find it worthwhile to pay for some missing back years if appropriate. It could be that they will take her near or over the pension credit level anyway, in which case saving more will likely be sensible.

exil

I don't think that's what the OP is after - it's more of a general question based on the principle that if one is only earning a small wage or relying on state benefits - is it really worth making pension arrangements on top of the state pension/S2P?

For most people on low incomes this is a hyphothetical question, every penny being needed for day-to-day expenses eg rent, food, bills.

Let's take as an example someone getting £6 an hour, a single person, full time, taking home about £1,200 a month after tax credit. Now they'd be looking forward to a state pension, plus pension credit, of about £500 a month. With S2p/serps that would go up to about £800. Which would mean about 2/3 of pre-retirement income. Is there any need to save money out of a not very large wage to increase this?

wotsthat

Pension credit is £115 per week plus council tax benefit and rent/ mortgage interest help as well.

If your friend, say, starts paying into a pension then the income from it will be taken into account and pension credit will be reduced. Clearly if pension income is low then the financial benefits could be zero as pension credits will be withdrawn proportionally until they reach zero. However, at income levels above this your friend starts to have an improved standard of living and does not have to rely on state benefits.

The difficulty is how this can be achieved. The pension pot size doesn't matter as it's the income that counts, however if they saved outside of a pension then pension credit would be withdrawn in proportion to the size of savings.

It's going to be difficult at 52 and on a low income to save enough to make it worth while but, by the same token, 52 does seem a little young to admit defeat and not try.

Going into retirement with no savings and relying 100% on the state isn't going to be pleasant.

jamesd

A state pension forecast is really needed here, plus any pension forecast from the employer, so we can see how close she will be to not needing pension credit. If she isn't certain that she is getting all the benefits and allowances she can now, checking that would be helpful.

If it does seem that pension credit will be a factor, using funds held in an investment bond may be useful, since investment bonds with 1% or more insurance component don't count as part of the income test for pension credit. This is one of the cases where a basic rate tax payer may benefit from them instead of a pension or ISA.

EdInvestor

jamesd wrote: »

If it does seem that pension credit will be a factor, using funds held in an investment bond may be useful, since investment bonds with 1% or more insurance component don't count as part of the income test for pension credit. This is one of the cases where a basic rate tax payer may benefit from them instead of a pension or ISA.

I don't think this works,b ecause although the capital in an IB is not counted, any withdrawals are deemed as income at the 10% return the DWP has decided everyone on benefits gets from their savings.

So it rather defeats the purpose.

jamesd

EdInvestor, please see this 2004 discussion:

"There is indeed a similar provision in Pension Credit - the life-related investment bond is disregarded as capital on the grounds that it's a life insurance policy (PC Regs Schedule V para 10, which mirrors IS Gen Regs Sch 10 para 15). DMG 84408 has pretty much the same wording as DMG 29403, though it has no reference to CD R(IS)7/98. I would consider the latter decision binding on PC, however. because PC is a successor benefit to IS for older people and the wording of the provision is the same.

That just leaves the capital draw-down element that your client gets - you say it's about £50 pcm. If this were IS, then following R(IS)7/98 this capital would be treated as income. In the PC Act (s. 15(6)(d)) there is a provision for prescribing circumstances in which capital is to be treated as income, as can happen in IS. But, so far, there seems to have been no such prescription in the PC Regs. So, I think the £50 pcm is simply capital being moved out of an area where it's disregarded (the investment bond) to one where it isn't (your client's bank account). ...

Conclusion (assuming the capital wasn't put into a bond to facilitate a PC claim): the bond and payments from it will be effectively ignored for PC purposes."

I do note that Paul Varjak said it would count, but that was apparently based on the income support situation, which is explained above.

I'd very much welcome it if you find any material, in particular a more authoritative source, to contradict this.

cheerfulcat

This seems to say otherwise.

" Volume 14 of the decision makers’ guide on the DWP website advises that investments which include some life insurance are disregarded indefinitely, for the purpose of establishing an individual’s entitlement to pension credit, if the agreement states how payment on death is worked out.
[...]
However, any income (ie regular withdrawals) taken from an investment bond will be taken into account since this would be deemed to be income from capital "

EdInvestor

http://www.metafaq.com/resources/standard_life/pensions/pb_statebc_05.pdf

jamesd

Yes, section 84408 in chapter 84 covers the capital itself being exempt.

The question then is whether and when withdrawing capital is income. "income from capital" is specified in 85004 in chapter 85 but I don't see any sign of a definition for what is income from capital and what is withdrawing and spending capital itself. There are a couple of examples in 85005 for rent but that's clearly income, not taking part of the capital and spending it.

Techno

I thought that to try to prevent the 'it's not worth saving for my old age if I can only afford to save a bit' mentality, you actually get a bit more pension credit if you have some savings than if you have none but you'd need to confirm this with the DWP