This piece first appeared in Saga Magazine in May 2011
The text here may not be identical to the published text  

Money News

Higher pensions, age allowances up, Tax fiddling, Inflation, Fuel payment, Fuel fillip

Higher pension for all
Don’t get too excited but the Chancellor has given his support to a new state pension of £140 a week – almost. The new pension would get rid of SERPS and other fiddly bits and give everyone who qualified a sum which is around £140 a week and certainly above the basic level of the means-tested pension credit which is now £137.35 a week.

In his spring Budget the Chancellor said

“The Pensions Minister, the Pensions Secretary and I have worked together to develop options including a new single-tier pension.” But he warned that it would still “be based on contributions” and “will not apply to current pensioners.” He said that it would be around £140 a week. But “it would cost no more than the current system.”

This flat-rate pension has been promised for some time by Pensions Minister Steve Webb and Secretary of State Iain Duncan Smith. But now the Chancellor is on board it really might happen. Further details – originally promised in December – are awaited and George Osborne warned Parliament “it will take years fully to come into effect.”

Watch this space.

Age allowances
People under 65 are to get another above inflation rise in the amount of money they can have before they begin to pay tax. The personal allowance rose by £1,000 in April to £7,475 and will rise by another £630 from April 2012 taking it to £8,105. This is less generous than it looks. Inflation will be high throughout this year and the allowance would have risen in any event by £390. So the extra above inflation, is just £240. And that will save tax of £48 a year – or 92p a week. Which is the price of two first class stamps.

Over 65s will fare less well. The actual rise in their higher tax allowances will not be announced until later this year. But they should increase by about £500 on their current levels to around £10,500. And the income level at which they begin to be taken away – currently £24,000 – will also rise in line with the Retail Prices Index in 2012.

Tax fiddling
The Chancellor is going to change the way he increases tax allowances. At the moment allowances normally rise each year in line with inflation as measured by the Retail Prices Index (RPI). But in future he wants to use the alternative measure of inflation called the Consumer Prices Index (CPI). The CPI is almost always lower than the RPI because it is based on slightly different data and it uses slightly different arithmetic. So by changing to the CPI the Treasury will raise tax-free allowances by less than they would rise using the RPI. So we will pay more tax.

The effect will be limited over the next few years as all the key allowances – including age allowances, blind allowance, and married couple’s allowance (which is only given to couples where at least one is aged at least 78) will be raised by RPI. But after 2014/15 they will move to CPI as well.

However, when it comes to raising tax the Treasury will stick to the RPI. So the duty on petrol, tobacco and alcohol will still go up each year with RPI – and often more. If that was changed to CPI then the Treasury would collect less money.

Inflation
There was bad news on inflation in the Budget papers. Forecasts by the independent Office for Budget Responsibility show that inflation as measured by the Retail Prices Index will be around 5% for the rest of this year and will be 3.9% by the start of 2016, after never below 3.4% in between. The Government’s new measure of inflation is the Consumer Prices Index (CPI) and that will be lower – it almost always is – and, strangely, will hit its official target rate of 2% in 2013 and stay there.

One way to counter inflation is to put your savings into National Savings Certificates which produce a guaranteed return linked to the Retail Prices Index. These certificates were stopped in July 2010 after huge demand. But they are returning at some point in 2011 and they will be linked to RPI, not CPI as some predicted. In the past they have paid 1% or 2% on top of RPI. But we do not know if the new certificates will offer that.

Payment cut
Winter Fuel Payment will be lower this winter. For the last three winters the payment has been £250 for a household where at least one person was born on 5 July 2010 or earlier and £400 if at least one person was aged at least 80 on 26 September 2010. But in winter 2011/12 those payments will be cut to £200 and £300. In May 2010 the Coalition Government promised that it would “protect key benefits for older people such as the winter fuel [payment].” And David Cameron made a similar promise to Saga readers. The Treasury now says that the extra £50 and £100 paid last winter and the one before were additional amounts to the basic winter fuel payment and were always seen as temporary even by the last Government. It is those additional amounts which are being ended not the payment itself. The qualifying age to get the payment will be almost 61 this winter. To qualify for the first time you have to have been born on 5 January 1951 or later. To get the higher payment you have to be 80 by 25 September 2011. More information at www.direct.gov.uk – put winter fuel in the search box.

Fuel pumped
The Chancellor is to spend around £2 billion a year to keep the price of petrol and diesel lower than it would have been. He cut the duty on fuel by 1p a litre; cancelled a 1p a year rise in duty which would have added another 5p to the price by April 2014; and he has postponed the rise due to inflation which was due in April this year until January 2012. A further inflation rise due in April 2012 has been put off until August 2012. However, by August next year when those two rises have kicked in the duty and VAT on a litre of fuel will be 6p higher than it is now. Unless there are further changes in future Budgets.


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