e-mail Paul Lewis on paul@paullewis.co.uk
Lower taxes and higher benefits for older people were promised by Chancellor Gordon Brown in his Pre-Budget Statement and Report on 27 November. In many ways the Autumn Pre-Budget is getting more and more like a second Budget. This time, Mr Brown did not just set the scene of what we might expect in the Spring Budget, he told us precisely what the tax allowances would be in 2002/03, the levels of pensions and other benefits from April 2002, the amount of the winter fuel payment for the next few years, and announced more details of the new Pension Credit which will begin in April 2003.
State pension
Each April pensions and other benefits normally rise by the rate of inflation the previous September. But last April the basic state retirement pension rose by much more - £5 a week. And the Chancellor confirmed there would be another inflation-beating rise this April. The basic pension will go up by £3 a week to £75.50. Married women claiming on their husband’s contributions will get an extra £1.80 a week, raising their pension to £45.20 a week. These increases are 4.1% and the same rise will apply to widows’ and bereavement benefits. Most other benefits and allowances will rise by the rate of inflation last September – which was 1.7%. And that lower rise will also apply to additional pension paid under the State Earnings Related Pension Scheme and graduated retirement benefit.
In the future, the Chancellor promised that each year the basic state pension would rise by at least 2.5% - that’s almost £2 a week at current levels – even if inflation is lower than that. That guarantee will avoid a repeat of April 2000 when inflation was 1.1% and the state pension rose by a derisory 75p. And with inflation in November at a 38 year low of 0.9% it could prove a very useful promise. The Chancellor also announced that the Winter Fuel Payment would be £200 each Winter for the rest of this Parliament – so probably until Winter 2004/05 or 2005/06.
Tax Allowances
Tax allowances – the amount of income we can have before any tax is due – are also raised each year in line with the rate of inflation the previous September. In his pre-Budget Statement the Chancellor announced that in 2002/03 someone aged 65-74 will be able to have an income of £6100 a year before any tax is due. For people aged 75 the amount will be £6370. These higher allowances for people over the age of 65 are reduced if income exceeds a certain amount. That limit will be raised to £17,900 for 2002/03. Once annual income reaches around £21,000 or more the allowance will be reduced to the same amount as that for younger people – £4615 in 2002/03.
This rise will be the last linked to the rate of inflation –future rises will be higher. The Chancellor confirmed that from April 2003, the tax allowances for people over 65 will be raised in line with earnings rather than prices. That should mean an increase of more than £250 in 2003/04.
The married couple's allowance (MCA) is only given to a married man if he – or his wife – was born before April 6th 1935. So in 2002/03 only couples where one partner is aged at least 68 during the tax year can get it. The allowance is worth £546.50 off the tax bill for those under 75 and £553.50 off for those over that age. These amounts are reduced if the husband’s income exceeds about £21,000 and are cut to £211 if it exceeds about £28,000.
Other details of the tax regime, such as the rates of tax and the lower rate band – which currently means that the rate of tax on the first £1880 income above the tax allowance is 10% – will be announced in the Budget in March.
| TABLE
Tax Allowances 2002/03 |
|||
| Age | 2001/02 | 2002/03 | Increase |
| Under 65 | £4535 | £4615 | £80 |
| 65-74 | £5990 | £6100 | £110 |
| 75 or more | £6260 | £6370 | £110 |
| MCA 67-74* | £536.50 | £546.50 | £10 |
| MCA 75+* | £543.50 | £553.50 | £10 |
| *These amounts are the value of the allowance - it is worth this much off your tax. Nominally the allowances are ten times this size. | |||
Minimum income guarantee
As well as an inflation-busting rise in the basic state pension, the minimum income guarantee (or income support) will also rise substantially from April. The increase will be 6.5% and will take the guarantee to £98.15 a week for a single person and £149.80 for a couple. If your income is less than that – and your savings are below £6000 – your income should be made up to that level. Even if your savings are as high as £12,000 you could get some help. The Chancellor also confirmed that the level of the minimum income guarantee would continue to rise in line with earnings rather than prices, so there should be further increases above price inflation over the next few years.
Pension credit
People with savings over £6,000 and anyone over 65 with an income above the minimum income guarantee will get more help from April 2003 when the new Pension Credit begins. The credit will top up the incomes of people who are just above the level to get the minimum income guarantee. At the moment as soon as your income goes above the minimum income guarantee then you get nothing from the state. In future, if you have a small private pension or savings over £6000 you will get up to £14 on top of your income to reward you for saving. However, the Government has made two big changes to the plans it announced in a year ago (they were set out in detail in Saga Magazine January 2001).
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First, the new system will only apply in full to people who are aged 65 or more – women pensioners aged 60-64 will be excluded. They will be able to get the minimum income guarantee – but they will not get the extra money if their income is just above the minimum income guarantee level. European law forbids discrimination between men and women. So the Government has to pay the new credit at the same age to men and women. Men get their retirement pension at 65 while women still get it at 60 (a special exemption to age discrimination rules allows that difference to continue until 2020). To conform with the law, the Government has chosen to deny the new credit to women aged 60-64. The alternative would be to pay it to men at 60, but that would be much more expensive, and complicated. The Government claims it could not be done.·
Second, the Government will continue to penalise people with high savings. At the moment anyone with savings over £6000 loses some of their minimum income guarantee and if savings exceed £12,000 then they can get no minimum income guarantee at all. A year ago the Government said it would scrap this rule and just count the income actually earned by savings. But it has changed its mind. Instead, from April 2003, the upper savings limit of £12,000 will be scrapped. So people with savings above that level may still be able to get both the minimum income guarantee and the new pension credit. The penalty for savings over £6000 will remain, though it will be more generous. At the moment the minimum income guarantee is reduced by £1 for every £250 of savings above £6000. In future that deduction will be halved to around 50p, though the exact details of how it will work have yet to be announced. It seems likely though that anyone with more than around £10,000 in savings will still see their minimum income guarantee reduced by more than the interest they can earn on their savings.
Five years
The Government also announced that once the pension credit had been awarded it will not normally change for five years even if your income or savings alter. However, if your income or savings fall dramatically you will be able to ask for an increase. They will also change if you are widowed – or you marry. But if your income or savings rise then the pension credit will not be reduced. Alistair Darling, the Secretary of State at the Department for Work and Pensions, told me that even a lottery win would not cut the pension credit during its five year term.
"To design a system for the comparitively few pensioners who win the lottery would be ludicrous. Once that award is fixed we will leave it fixed unless there has been a major change in circumstances. But if you win the lottery good luck to you."
Claiming
One of the big problems with minimum income guarantee – and it will apply even more to the pension credit – is getting people to claim it. The latest figures from the Government show that up to 770,000 older people do not claim the minimum income guarantee – losing an average of £22 a week each and saving the Government nearly £900 million a year. Far more people will be entitled to claim the pension credit and if the Government does not find a way to ensure that everyone gets their entitlement the new scheme will not achieve its objectives.
The Government says that claiming the pension credit will be routine for everyone when they reach pension age and first get their state pension. But even if that is true, it does not deal with the people who have already retired when the credit begins next April. Roughly five million people will be entitled to more money once the credit begins. Persuading them to claim will be difficult. Last year a £15 million campaign to get people to claim the minimum income guarantee resulted in just over 100,000 successful claims and many of those were due to the higher rates of benefit which began in April 2001.
At the moment, between a quarter and a third of those who could claim minimum income guarantee do not do so. So it is quite possible that between one and two million people who could claim the new pension credit will not actually get it.
February 2002
e-mail Paul Lewis on paul@paullewis.co.uk