This Briefing Note describes state pension provision in the United Kingdom from the inception of the basic state pension in 1948, following the Beveridge Report, to Pensions Act 2007 and the plans of the Conservative/Liberal Democrat coalition government. The main objective is to provide a comprehensive description of the rules that currently determine pension benefits as well as those that have been in place in the past. However, we also provide a brief historical overview of the dilemmas facing policymakers when contemplating pension reforms and a summary of the most recent reforms. The history of the UK pension system is the story of a mainly non-contributory system, periodically tempted by the higher replacement rate of social insurance schemes, but always frightened once the costs become apparent. Recent reforms have tilted the system further in the direction of a universal flat-rate benefit, abandoning any social insurance design. This confirms that the main objective of the UK state pension system is to reduce poverty at old age. These flat-rate pensions will also reduce the reliance of the system on means-tested benefits, somewhat reinforcing the Beveridgean design of the system. Given these clarifications, it is unfortunate that the latest reforms have still sought to maintain much of the complex structure of the pre-existing system instead of reforming and rationalising it. However, once issues of transition have been dealt with, there may yet be scope for simplifying the presentation of the rules. * This paper was funded by the ESRC Centre for the Microeconomic Analysis of Public Policy at the Institute for Fiscal Studies (RES-544-28-5001). The authors would like to thank Carl Emmerson for useful comments on an earlier draft of this Briefing Note and Judith Payne for copy-editing. All remaining errors are the responsibility of the authors.
We provide new empirical evidence on the importance of defined contribution pension wealth in England, and the nature of annuitization decisions taken by older adults who retire with such sources of wealth. Other things equal, financial literacy, and numeracy in particular, are important factors governing individuals’ choices over whether to shop around for an annuity as opposed to taking the ‘path of least resistance’ option and purchasing from their original pension fund provider. This has important policy and welfare implications given that buying an annuity on the open market has significant financial benefits for most people. In the context of the increasing reliance on private provision for retirement, the importance of individuals having the financial literacy to successfully navigate complex financial decisions late in life should not be underestimated.
Recent years have seen substantial reductions in public spending on social care for older people in England. This has not only led to large falls in the number of people over the age of 65 receiving publicly funded social care, but also to growing concern about the potential knock-on effects on other public services, and in particular the National Health Service (NHS). In this paper, we exploit regional variation in the reductions in public funding for social care to examine the impact on Accident and Emergency (A&E) departments in NHS hospitals. We find that reductions in social care spending on people aged 65 and above have led to increased use of A&E services, both in terms of the average number of visits per resident and the number of unique patients visiting A&E each year. We estimate that the average cut to social care spending for the older population over the period (£375) led to an increase of 0.09 visits per resident, compared to a mean of 0.37 visits in 2009. The effects are most pronounced among people aged 85 and above. This has also led to a modest increase in the cost of providing A&E care, increasing A&E costs by an additional £3 per resident for each £100 cut in social care funding.
For many years, survey data on household wealth have been somewhat limited, but the situation is improving in the UK and internationally. This paper uses the new Wealth and Assets Survey (WAS) to document some key features of the distribution of household wealth in Great Britain. We quantify the extent of inequality in total wealth and in its broad components (financial wealth, housing wealth and pension wealth). Exploiting the fact that WAS is a longitudinal survey, we show trajectories of wealth and its components over * Submitted August 2015.The authors gratefully acknowledge funding from the IFS Retirement Saving Consortium and the Economic and Social Research Council (ESRC) through the Centre for the Microeconomic Analysis of Public Policy at IFS (grant number
We use comparable data from the US and England to examine similarities and differences in the level and trajectories of assets among households aged 70 and over. We find that in the US assets on average decline gradually with age, while in England older households actually accumulate wealth. These differences appear to be driven largely, though not entirely, by housing wealth: over the period we consider, house price growth drove increases in housing wealth in England that more than offset the slow drawdown of non-housing wealth. This suggests the illiquid nature of housing is likely to be an important factor in explaining wealth drawdown at older ages. We also consider the * Submitted October 2015.The authors thank Thomas Crossley, Mariacristina De Nardi, John Jones and an anonymous referee for comments. r This difference is partly, but not entirely, due to more rapid house price appreciation in England over the period.r Our results suggest the illiquid nature of housing is likely to be an important factor in explaining wealth drawdown at older ages.
We investigate the impact of inheritances and gifts received on the distribution of wealth. Whereas previous work has looked only at marketable wealth, we consider broader measures of wealth including state and private pensions. We find that once pension wealth is included, inheritances and gifts no longer have an equalising impact on the distribution of wealth. Without pension wealth, including wealth transfers reduces the Gini coefficient for wealth from 0.57 to 0.52. With pension wealth, the impact is negligible. We argue that this latter effect gives a better indication of the impact of inheritances on the distribution of lifetime income. 56Fiscal Studies Policy pointsr The relative importance of inheritances and other intergenerational transfers in determining the lifetime economic resources of individuals is widely thought to be increasing over time. This has led to concerns about widening intragenerational inequality and an adverse impact on intergenerational mobility.r Nearly one-third of individuals aged 65-79 in England in 2012-13 had received an inheritance in the past, and 6 per cent had received a gift worth £1,000 or more (in 2012 prices).r Inheritances are smaller in absolute terms for those lower down the wealth distribution, but they are more important relative to other wealth holdings.Inheritances therefore act to make the distribution of non-pension wealth less unequal.r However, this inequality-reducing impact of inheritances and gifts shrinks (or even disappears) when public and private pensions are included in the measure of household wealth. This is important because, in the UK context, the impact of transfers on the distribution of this broader measure of wealth likely gives a better indication of the impact of transfers on lifetime incomes.
Using a lifecycle model of consumption, saving and portfolio choice combined with linked survey and administrative data on wealth and lifetime earnings we evaluate measures of retirement preparedness. We estimate heterogeneous discount factors for households and compare these estimates of their patience to their replacement rates-the simple measure often used to evaluate the adequacy of retirement savings. We find first that the specification of the model's asset structure matters quantitatively for preference parameter estimates-households appear to be much more patient when they are assumed to have access only to a riskfree asset compared to when we account for the fact that much of their wealth is stored in higher-return tax-advantaged private pensions and in housing. Second, we find that only the most patient households achieve the replacement rates out of final earnings that are often recommended by policymakers and industry as sensible benchmarks for retirement preparedness. Notwithstanding this, we find that even quite impatient households in the population we study achieve high replacement rates out of lifetime average income-a more sensible summary measure of preparedness for retirement.
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