Credit Where It's Due

In just over two years time means-testing will be back at the heart of the money the state gives to pensioners. The Government plans to introduce what it calls a ‘Pension Credit’ in April 2003 which will boost the incomes of millions of people over 60. The Secretary of State Alistair Darling has called it "the most fundamental change in the Social Security system for 50 years". In fact, it is more than 75 years since the means-test for retirement pension was abolished. Labour may be about to bring it back.

Of course, the basic retirement pension paid for out of National Insurance contributions will not be means-tested. But as it rises only with prices each year it becomes less and less important as a way of making sure that pensioners share in the rising prosperity of the country – a promise Labour made in its 1997 Election Manifesto. One way of doing that would be to raise the basic retirement pension in line with the rise in average earnings. But the Government has said it will not do that – it will raise the basic pension only in line with prices. Instead, it will raise the means-tested minimum income guarantee (which will be renamed pension credit) in line with earnings. That means more and more people will become entitled to the means-tested benefit. From 2003 half of all pensioners will be entitled to the pension credit and as time passes that number will rise.

The Pension Credit will have two parts.

· A basic minimum income guarantee

· A top-up for those with some income of their own.

By April 2003 the Government says the basic retirement pension will be £77 a week and the minimum income guarantee will be £100. At the moment the pension is £67.50 and the minimum income guarantee is £78.45. So the new system will represent a big rise in the money paid to pensioners.

Assuming you have the basic state pension of £77, you will get an extra £23 minus 40p for each £1 of income you have above the basic state pension of £77. So single pensioners with an income of less than £134.50 will get extra help from the state. For a couple the figure is around £200 a week. It will work like this

· If your income is below £100 you will get

o Minimum income guarantee to take your income up to £100

PLUS

o An income credit of 60p for each pound of other income you have on top of the retirement pension of £77.

· If your income is £100 or above you will get

o No minimum income guarantee

o An income credit starting at £13.80 a week if your income is £100 and falling to zero as your own total income reaches £134.50.

The extra income you have can be from savings, a pension of your own (including SERPS), or earnings. The effect can be seen in the table.

The Government says that will reward savings. Under the present system any savings or any income from a pension or earnings reduces the amount of minimum income guarantee which is paid. For example, someone with the basic state retirement pension of £77 (from 2003) could get an extra £23 to bring her weekly income up to the minimum income guarantee level of £100. But suppose she had put money into a small pension scheme at work and that pension was now £23 a week. Her total income from her own resources would then be £100 a week. Because her income was at the level of the minimum income guarantee she would get nothing extra. In other words, she would get exactly the same amount as if she had not saved at all. But under the pension credit she would get extra money – another £13.80 a week.

However, there are a lot of unanswered questions.

· People with savings up to around £6000 could end up worse off by £3 or £4 a week. What compensation will they get?

· How will the Government make the means-test simpler so that everyone gets what they are entitled to? At the moment at least 500,000 people who could claim it do not do so. A £12 million publicity campaign has found only 25,000 of them.

· How will the calculation work for people who get a reduced retirement pension? Under the present plans they could still end up losing 100% of any extra income they have saved or earned.

· How will help with council tax and rent be affected? At the moment they fit in with the minimum income guarantee system – in future it is not clear how they will be worked out.

The Government wants to hear what people think of the new plans and you can let it know your thoughts before the end of February. You can get a copy of the paper free by calling 020 8867 3201 (or 020 8867 3217 textphone). Or you can download one from the Department of Social Security website www.dss.gov.uk/publications/dss/2000/pencred/index.htm. Details of how to respond are at the end of that document or you can e-mail your response to

pension-credit-team@ms41.dss.gsi.gov.uk.

January 2001

e-mail Paul Lewis on paul@paullewis.co.uk