Pension Credit 'can't be sustained'

LABOUR'S benefit for the elderly is 'unsustainable' because it is destroying the incentive to save, says the Government's pensions supremo. The Pension Credit, a flagship scheme, will 'severely interfere' with the desire of many to provide for themselves, he will declare.

Around 2.5m claim the payment out of 5.5m who are eligible. But Adair Turner, head of the Government's Pension Commission, warns that Britain cannot end up with more than half of its 11m pensioners on the means-tested handout.

It tops up the income of a single person by a minimum of £109.45 a week or £167.05 for couples. His warning follows pension industry calculations that anyone earning less than £30,000 a year might as well not save directly and let the State pay up through means-tested benefits.

What is more, if Gordon Brown tries to fix the problem by compelling workers to put a chunk of their income into a pension scheme Turner believes there will be a huge political backlash and some will even give up work rather than pay it.

Turner was asked by Prime Minister Tony Blair to come up with radical ideas for ensuring the State pension system remains affordable despite the rapidly expanding elderly population. The former CBI director-general is to publish his final report in November.

Ministers were already jumpy about what Turner will come up with. He revealed another controversial proposal at the weekend - suggesting that the middle classes could be banned from receiving their basic State pension until aged 70, while the working class could still claim it at 65, because professionals survive on average five years longer after retirement.

But the Government will be even more uncomfortable about his criticism of the Chancellor's tax credits. It is understood Turner will argue that the Pensions Credit is deeply flawed because it rises each year in line with wages inflation, pushing it steadily ahead of the State pension. As a result it is pulling ever more pensioners into means-testing and deterring them from saving.

Turner gave a sneak preview of his view on the pension credit in a private address to the National Association of Pension Funds last week. He said: 'The long-term consequences of continuing with present indexation plans are not sustainable.'

He went on: 'We cannot end up with a system in which over half of all pensioners are means tested in retirement without that severely interfering with the system of earnings related pension provision.'

A Pension Commission source said: 'If you try to solve this by means of compulsion there will be a problem because people who are already only 5% to 10% better off in work will possibly opt to get out of it.'