UK – Saving for retirement can actually leave you worse off – that’s the message from Frank Field, former minister for welfare reform in the labour government.

Field has published a booklet with Politeia, a forum for social and economic thinking, entitled ‘How Saving Damages Your Retirement’. In the booklet he explains how an increase in means-tested benefits has “undermined the system”, and how many workers who have paid taxes and made contributions have ended up losers.

Field’s reasoning that people may be better off not working and not having a pension is based on the widening gap between the basic state contributory pension and the minimum income guarantee (income support).

In April 1998, the means-tested minimum income guarantee (MIG) was set at 70.45 pounds, whereas the basic state contributory pension was set at only 64.70 pounds – only 92% of the MIG.

This gap has widened further since, so that the state pension’s value is now below two-thirds of the MIG. In addition with an MIG individuals receive council tax relief and free rent, so that an MIG recipient has a net income of around 100 pounds more a week than the basic state pension.

Even those with an occupational pension scheme in addition are still worse off than those MIG recipients. In 2001, average income from occupational pensions totalled only 68 pounds a week. Therefore a significant proportion of pensioners had an occupational pension providing about as much as they would have gained if they hadn’t saved at all and relied solely on means-tested assistance.

This is not bad news for those pensioners eligible for MIG, but rather for those who have saved over so many years.

Field stresses that the government’s pension reforms in discussion at present need to restore confidence in pensions and savings for the future, and must be based on principles which work. “The goal must be to establish for the first time in Britain a first-tier pension which is universal and which pays a sum above means-tested assistance level,” says Field.