Sorry guv,
what’s that I hear you say?
What do you mean – you don’t know what Marginal Deduction Rates are?
Don’t worry, there’s a whole swathe of fine upstanding UK citizenry who feel lost in a fog of rising gloom when asked the same thing. However, if you plan on retiring at some point then let’s try to clarify this aspect surrounding the new auto-enrollment Personal Accounts which will soon be a feature of modern retirement here in the UK, like it or no.
It goes something like this…
A Marginal Deduction Rate (MDR) is the chunk of the pension you’re likely to miss out on because the extra Personal Account pension money you get is actually going to be offset by slashing your mean tested benefits money to make up for the ‘extra’ you’re be getting through your new Personal Account Pension.
This would mean for example that for every £1.00 you want to save in your Personal Account Pension you’d only actually benefit to the tune of 60p if you had been assigned an MDR of 40%. Hmmm… “The Lord giveth and the Lord…”
Yep, somewhat concerning isn’t it? So is it going to affect you and perhaps even more importantly, how much MDR will be taken out of your Pensions Piggy Bank Savings?
30%, 50%, 80%?
That is a vital question and one to be frank it’s a slippery eel to answer because at this stage a sea of ambiguous mist surrounds these mysterious taxes – oops sorry! Did I call them taxes? I’m blushing, must have been an innocent Freudian slip. I will of course call them by their proper name – Marginal Deduction Rates or MDRs from now on.
Perhaps the clearest view in all the fog comes from the latest Briefing Note (44) from the Pension Policy Institute.
Their projections state the following… “PPI modelling shows future levels of eligibility for means-tested benefits are very uncertain.” and more worrying still… “In the current figures, the proportion of households facing moderate MDRs (20-60%) falls between 2005 and 2050. The proportion facing high MDRs (80%+) remains at around 20%.”
Yikes, now that really is an unpleasant scenario – imagine losing 80p+ out of every £1.00 you diligently save for your new Personal Pension Account. Grim indeed.
What seems most unfair to me, is that this will hit hard those who can least afford these sort of income drops as they enter retirement… but ain’t that always the way?
Please let me know what you think about these MDRs. It’s quite an emotional topic this one, especially if you’ve loved ones facing a retirement that is financially stressful, but if you can leave a few lines below maybe we can all gain from your perspectives. I also highly recommend reading the Briefing Note mentioned above. You can get it directly here.
Until next time…
