The meanness of means testing

Growing concerns over the interaction of means-testing with auto-enrolment into personal accounts and 'good' occupational pension systems, have not been allayed by the final report from the Thoresen Review of Generic Financial Advice.

Originally the review was expected to outline how a national scheme of tailored generic financial advice would work, and how it would provide basic information on financial issues such as means-testing and pension saving.

Instead, the final report - published in the past month - recommended a 'money guidance' service, and although it will look at financial issues including retirement planning, it failed to provide specific details on personal accounts as the legislation is "still being debated".

However, as the 'pathfinder' for the new service is expected to take two years to complete, this could leave between 35% - 65% of pensioner households on means-tested benefits without information to help them decide whether to opt-out of personal accounts.

John Lawson, head of pensions policy at Standard Life, points out the issue is "potentially a fatal flaw" which could "kill personal accounts", as without the right information there could be confusion about exactly who will be worse off by saving, leading those who might actually benefit to opt-out.

"We need a solution to get rid of the means-testing issue. The only feasible one at the moment is the idea of a pension income disregard of £12 a week, put forward by the Pension Policy Institute (PPI)."

Lawson admits the proposals "don't get rid of everyone" from the means-testing net, but argues that it would "blunt the disincentive" by reducing the number of pensioner households affected to around 10%.

"We need to make it safe for people to save, but I don't think generic advice, or money guidance is the answer. Pension disregard is estimated to cost £600m a year, which is not a lot in government finance terms. The government is under a lot of pressure and I think it is now politically impossible not to do anything," adds Lawson.

This view is supported by research from the PPI, which warns that if no further reforms are made around 20% of people could lose up to 80% of means-tested benefits by saving in a pension in 2050, exactly the same level recorded in 2005.

But John Jory, deputy chief executive of B&CE Schemes – which sponsored the pension disregard research – claims the biggest problem is that low-to-moderate earners are "unlikely to actively seek advice", so many people will not know whether they should have saved or not until they actually retire, when it is too late.

"If an individual has an opportunity to save with a matching employer contribution, it ought to be a 'no-brainer'. Our concern is that people who ought to be saving may be put off because of the thought that they may end up worse off at retirement."

As a result, Jory suggests the best way of providing people with information is through "face-to-face presentations in conjunction with their employer".

"We really have to work to remove these obstacles so people can save for their retirement safe in the knowledge they will be better off than someone who saves nothing," he adds.

1 April 2008