We're picking up plenty of noise on the internet today about tax and long-term savings. There's also much being said about the fact that so many pensioners these days are losing out because of the fall in interest rates. I thought you'd be interested in reading a few of these and maybe, like me, then thinking about all of them together to get a feel for where the debate may be going. There's sort of a 'Perfect Storm' brewing in the tax and benefits system I think. To start with there's a link here to a Fabian Society paper where Peter Mandelson is talking about raising the higher rate of income tax to 45%
to new analysis of official data that was launched as part of the ESRC Festival of Social Science yesterday. It demonstrates that older and poorer households are facing much higher average inflation rates than younger and richer ones, as the former have tended to suffer most from continued high annual inflation in food and domestic energy costs, while the latter have tended to benefit most from cuts in mortgage rates and falling car fuel bills.
Much of this cropped up in a debate in the Lords yesterday afternoon that I have reproduced in part below for you to see.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord McKenzie of Luton): My Lords, tackling pensioner poverty remains a key priority, and we are committed to supporting pensioners during these difficult times. We will continue to build on the substantial progress we have made in lifting 900,000 pensioners out of relative poverty since 1998-99 on an after-housing-cost basis. In 2008-09, we provided extra help to pensioners through one-off boosts to the Christmas bonus and winter fuel payments and we are spending over £13 billion more on pensioners than if 1997 policies had continued.
Baroness Seccombe: My Lords, I thank the Minister for his Answer, which was probably predictable. I declare an obvious interest as I am a pensioner. Interest rates have plummeted but does the Minister think that it is right and fair that savers, most of whom are elderly and rely on investment income, are subsidising those who took on outsize mortgages?
Lord McKenzie of Luton: My Lords, I am not sure that that is an appropriate way to look at the issue. The Government keep all savings incentives under review and we should be clear about the extent of the issue, which is that 42 per cent of pensioners receive less than £1 a week or no income from investments. Around 70 per cent of pensioner benefit units receive less than £10 a week from investments. It is estimated that an 80 per cent reduction in investment income, which is roughly what has happened, would reduce pensioners’ net income before housing costs by 3 per cent on average but less than 1 per cent on the basis of a median analysis. It is an issue but it is not of the scale that some suggest.
Baroness Greengross: My Lords, is there any way in which the noble Lord could try to speed up the introduction of uprating state pension in line with earnings so that it is earlier than intended? That would help a lot of poorer pensioners among us who are suffering, as the noble Baroness suggested, because their savings are not giving them any return on their income.
Lord McKenzie of Luton: My Lords, the uprating of the pension from this April is 5 per cent, which is RPI. That, of course, is currently in excess of earnings. The ongoing uprating of pension was laid down in the Pensions Act 2007, which was to uprate in 2012 subject to affordability, and in any event by the end of the next Parliament. That remains the Government’s position.
Lord McKenzie of Luton: My Lords, the Government’s approach to savings looks at incentives right across the life cycle, so we see ISAs as a key way, apart from pensions, to incentivise savings for working-age people. There are gateway proposals to help people on lower incomes to get into a savings culture, and child trust
Lord Fearn: My Lords, will any pressure be brought upon the banks in which the Government have taken a stake to increase pensioners’ income by increasing the interest rate? By that, I mean all pensioners rather than a few. It is all right to talk about fuel poverty, but this is about no one particular thing; it is about what they have saved up for their whole lives.
Lord McKenzie of Luton: My Lords, it should not be part of the process of engaging with the banks in which the Government have substantial interests to direct a particular interest-rate policy toward pensioners rather than addressing general market issues. There are, obviously, much more substantial issues for the banking sector, in getting money flowing into the economy and making sure that depositors feel and know that their deposits are safe.
Lord Skelmersdale: My Lords, some three weeks ago, on a Starred Question from the noble Baroness, Lady Greengross, I put to the Minister the Conservatives’ commitment to abolish income tax on savings for basic-rate taxpayers and to raise the pensioner’s personal allowance by £2,000. The Minister gave me a rather throwaway answer, saying, “Well, my Lords, we will have to cost it”. What work have the Government put in hand to achieve that costing?
Lord McKenzie of Luton: My Lords, I am grateful for the opportunity of a supplementary question on that matter. From April 2010, 60 per cent of pensioners over the age of 65 will pay no income tax. The Conservative policy would, therefore, presumably be skewed toward helping the better-off. I understand that the proposed funding for the arrangements is something like £5 billion, cut from public expenditure; in particular, that £2,000 increase in the personal allowance would cost around £1.3 billion.
Lord Higgins: My Lords, is it not completely wrong that neither this House nor the other place has had any opportunity to debate the unprecedented Statement last week by the Chancellor of the Exchequer, on authorising the Bank of England to issue something like £150 billion of new money? That will seriously affect interest rates. Also, have the Government estimated the extent to which that action will further reduce the few remaining final-salary schemes as a result of its effect on their balance sheets?
Lord McKenzie of Luton: My Lords, this supplementary seems some way from the original Question, but I will try to help the noble Lord. Quantitative easing is about trying to get money flowing back into the economy. As for the specific impact on pensions, it is likely to have an impact on gilt prices—in the short term, at least—and, therefore, on gilt yields
10 March 2009
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