Relax about the 'granny tax'
Today’s budget announcements included the decision to end the higher personal income tax allowance for people aged over 65 (currently set at £10,500) and over 75 (currently set at £10,660) from April 2013. However, people already aged 65+ will not be immediately affected, instead their allowance will be frozen. It will be people who turn 65 next year or subsequently who will stand to lose around £285 each year - the gap between the new universal personal tax allowance of £9,105 from 2013 and the minimum tax allowance of £10,500 for people already aged 65+.
This announcement has since generated a lot of hoo-ha about ‘a tax on grannies’, which is perhaps inevitable as the budget’s losers are always going to generate more headlines than those who have benefited. But if we take a step back it is difficult to argue that pensioners as a cohort are getting a bad deal in the context of the wide-reaching welfare reforms currently taking place.
For a start, the Government has already shown its commitment to protecting pensioners’ incomes through the so-called ‘triple-lock’ since April 2011, whereby the state pension is to be uprated by earnings, prices or 2.5 per cent, whichever is the highest. Today’s budget also demonstrates a continued Government commitment to provide pensioner benefits such as the Winter Fuel Payment, which is worth £200 for pensioners aged under 80 and £300 for pensioners aged 80 or over. This is payable to people who receive a state pension regardless of whether they are yet retired. Therefore a working person aged 65 can currently receive a Winter Fuel Payment on top of their normal salary.
The real issue is the ongoing scandal of pensioner poverty, which is estimated to affect over a fifth of people in the UK aged over 65, compared to only around 6 per cent of older people in the Netherlands and an average of 16 per cent of pensioners across the EU as a whole. Therefore, the important announcement in today’s budget was the Government’s confirmation of its decision to move towards a single-tier state pension. As we’ve previously argued in our report Coming of Age, this is a significant move towards helping people to plan for their retirement and tackling pensioner poverty, as it should ensure that the basic state pension is simple to understand, that most people are eligible for it and that it is set at an adequate level.
Rather than complaining about a ‘tax on grannies’ that will actually reduce most older people's incomes by a relatively small amount (compensated for in cash terms by this year's increase in the state pension of 5.3 per cent), the debate at this point should be about who will be eligible for the new flat-rate basic state pension and whether £140 is the correct rate for it to be set at. Some of the EU countries that currently perform best on rates of pensioner poverty, such as the Netherlands and Sweden, provide considerably more generous basic pensions. They also have lower eligibility criteria than that proposed by DWP’s 2011 pensions white paper, which suggested only people who have made seven years’ worth of pension contributions would be eligible.
Let’s first worry about pensioners who have an annual income substantially lower than the personal tax threshold (e.g. anyone living on a basic state pension or Pension Credit) before we get concerned about those being taxed on higher incomes.