Title
Contents
Foreword 9
Summary 11
1. The Savings Incentives Work Programme 27
2. Overview of the tax and benefit system for pensions and pensioners 29
2.1 Supporting people to save sufficiently to provide an adequate income for themselves 30
2.2 Alleviation of poverty and help with extra needs 34
2.2.1 How does income-related support change as incomes rise? 35
2.2.2 The balance between contributory and income-related support 37
2.3 Does State support reduce incentives to save? 40
3. How and why do people save for retirement? 42
3.1 Economic reasons to save for retirement 43
3.1.1 The income motive: To increase their retirement income 43
3.1.2 The price motive: To achieve good returns on their pension investment 44
3.1.3 Additional motives 44
3.1.4 The effect of these motives 45
3.2 Barriers to saving in practice 46
3.3 Attitudes to saving 47
3.3.1 Evidence on individuals' understanding and behaviour 52
4. Financial incentives to save for retirement under reform 53
4.1 Our analytical approach 55
4.2 Expected payback for individuals 60
4.3 Range of returns 63
4.4 Sensitivity analysis 65
4.5 Comparison of incentives with and without pensions reform 67
4.6 Alternative outcome measures 68
4.7 Outcomes from saving in alternative vehicles 70
5. Characteristics of those with different levels of payback 73
5.1 Those with very limited State Pension entitlement or other savings, or limited entitlement/savings and extra needs 74
5.2 Those renting in retirement 75
5.3 The majority group 78
5.4 Summary 80
6. Analysis of policy measures suggested by stakeholders 81
6.1 Criteria 82
6.2 Changing taper rates on savings 84
6.3 Abolish Savings Credit 84
6.3.1 Description 84
6.3.2 Clarity of message 84
6.3.3 Impact on expected outcomes from pension saving 84
6.3.4 Low incomes 86
6.3.5 Operational impacts 86
6.3.6 Benefit expenditure 87
6.4 30% taper rate 87
6.4.1 Description 87
6.4.2 Clarity of message 87
6.4.3 Impact on expected outcomes from pension saving 87
6.4.4 Low income 89
6.4.5 Operational impacts 89
6.4.6 Benefit expenditure 89
6.5 Private pension income disregard 89
6.5.1 Description 89
6.5.2 Clarity of message 90
6.5.3 Impact on expected outcomes from pension saving 90
6.5.4 Low income 93
6.5.5 Operational impacts 93
6.5.6 Benefit expenditure 93
6.6 Combined income disregard and Savings Credit taper rate 93
6.6.1 Description 93
6.6.2 Clarity of message 94
6.6.3 Impact on expected outcomes from pension saving 94
6.6.4 Low income 95
6.6.5 Operational impacts 95
6.6.6 Benefit expenditure 95
6.7 Capital disregard 96
6.7.1 Description 96
6.7.2 Clarity of message 96
6.7.3 Impact on expected outcomes from pension saving 97
6.7.4 Low income 98
6.7.5 Operational Impacts 98
6.7.6 Benefit expenditure 98
6.8 Flexible disregard 98
6.8.1 Description 98
6.8.2 Clarity of message 98
6.8.3 Impact on expected outcomes from pension saving 98
6.8.4 Low income 99
6.8.5 Operational impacts 99
6.8.6 Benefit expenditure 99
6.9 Trivial commutation 99
6.9.1 Description 99
6.9.2 Clarity of message 100
6.9.3 Impact on expected outcomes from pension saving 100
6.9.4 Low incomes 101
6.9.5 Operational impacts 101
6.9.6 Benefit expenditure 101
6.10 Trivial commutation limit and capital disregard 101
6.10.1 Description 101
6.10.2 Clarity of message 102
6.10.3 Impact on expected outcomes from pension saving 102
6.10.4 Low income 102
6.10.5 Operational impacts 103
6.10.6 Benefit expenditure 103
6.11 Summary tables of policy measures analysis 103
7. Information and communications 108
7.1 The impact of uncertainty on communications 111
Appendix A: Notes on modelling and analysis and further sensitivity analysis 112
Appendix B: Analysis of the target population 126
Appendix C: The impact of different choices on outcomes 136
Appendix D: The impact of benefit entitlement in working life 143
Appendix E: The Savings Incentives Work Programme 145
Table 1 Payback from saving for the core case studies 17
Table 2 Payback from saving for the supplementary case studies 18
Table 3 Payback with and without the Pensions Acts 2007 and 2008 reforms 19
Table 2.1 Projections of proportion of pensioner households entitled to income-related benefits 35
Table 2.2 Tapers across different income-related benefits (for a single pensioner aged 65 or more with no additional premiums) 36
Table 2.3 Levels of State Pension and Guarantee Credit, 2008/09 earnings terms 38
Table 4.1 Weekly income and payback from saving for the core case studies 60
Table 4.2 Outcomes from saving for the core case studies with varied decumulation decisions 61
Table 4.3 Weekly income and payback from saving for the supplementary case studies 64
Table 4.4 Payback with and without reform 68
Table 4.5 Comparison of outcome measures 70
Table 6.1 Impacts of the policy measures in 2050 104
Table 6.2 Impacts of the policy measures on the case study examples 105
Table 6.3 Impact on the proportion with payback of less than L1 plus inflation 107
Table A.1 The main assumptions used under the base and scenario variants 119
Table B.1 Position in income distribution of working-age adults 130
Table C.1 Varying assumptions on contributing during a career break 138
Table C.2 Varying assumptions on contributing for the median man 139
Table C.3 Impact of working five years part-time from SPA with drawdown on State Pension from SPA 141
Figure 1 Median real payback for people saving in a defined contribution pension with employer contribution after 2012 20
Figure 2 Distribution of real payback from saving in a defined contribution pension with employer contribution after 2012 21
Figure 2.1 A graphical representation of the objectives faced by Government 30
Figure 2.2 The number of people accruing entitlement to the State Second Pension compared to accruals if SERPS was still in place in 2005/06 32
Figure 2.3 Projected State spending on pensioners 39
Figure 4.1 Overview of case study methodology 59
Figure 4.2 Median real payback for people saving in a defined contribution pension with employer contribution after 2012 62
Figure 4.3 Distribution of real payback from saving in a defined contribution pension with employer contribution after 2012 63
Figure 4.4 Median real payback from saving in a defined contribution pension after 2012: Scenario 1 assumptions 66
Figure 4.5 Median real payback from saving in a defined contribution pension after 2012: Scenario 2 assumptions 66
Figure 5.1 Median real payback for those renting in retirement 76
Figure 5.2 Median real payback for those on lower earnings 79
Figure 6.1 Median real payback with and without Savings Credit 85
Figure 6.2 Proportion with real payback of less than L1 plus inflation with and without Savings Credit 86
Figure 6.3 Median real payback with 40% and 30% Savings Credit tapers 88
Figure 6.4 Proportion with real payback of less than L1 plus inflation with 40% and 30% Savings Credit tapers 89
Figure 6.5 Median real payback without and with a L15 income disregard 92
Figure 6.6 Proportion with real payback of less than L1 plus inflation without and with a L15 income disregard 92
Figure 6.7 Proportion with real payback of less than L1 plus inflation, with and without income disregard and 50% taper rate 95
Figure A.1 Characteristics used to define case studies 114
Figure B.1 Male earnings trajectories across the income distribution 128
Figure B.2 Female earnings trajectories across the income distribution 129
Figure B.3 State Pension entitlement of male pensioners 132
Figure B.4 State Pension entitlement of female pensioners 133
Figure B.5 Average years of accrual from 1975 by source 134
Figure C.1 Median real payback with all pension pots annuitised 137
Boxes
Box 2a: Pension lump sums 32
Box 2b: Do people want income or capital in retirement? 37
Box 2c: Private pension reforms 40
Box 3a: Saving in a rational world: National Institute Tax and Benefit Model (NIBAX) 45
Box 3b: Behavioural barriers to saving for retirement 46
Box 3c: Why individuals said they would stay in or opt out of the personal accounts scheme if automatically enrolled 49
Box 3d: Why people may decide to remain in or opt out of personal accounts: Report of a qualitative study 50
Box 4a: Payback 54
Box 4b: Lessons from the Savings Incentives Work Programme: factors influencing outcomes in retirement 56
Box 4c: Lessons from the Savings Incentives Work Programme: choosing appropriate case studies 58
Box 4d: Lessons from the Savings Incentives Work Programme: the importance of sensitivity analysis 65
Box 4e: Outcomes from saving in alternative vehicles 71
Box 5a: Impact of HB on payback 77
Box 7a: challenging myths around saving 111
Box E1: Terms of Reference for the Government's Pension Savings Incentives Work Programme 147