Some better news at last for pensioners - A budget for borrowers, but nothing for savers

by Dr. Ros Altmann

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Major headlines

State pension uprated in line with 5.2% September cpi

Both Basic and State Second Pension increased by full September cpi

Pension Credit increased by £5-35 (3.9% rise, well above 2.8% earnings rise)

No change to pensions tax relief or tax free lump sum

Business Finance Partnership - pension fund assets to help fund infrastructure

Increase in state pension age to 67 is fine, but shame the Chancellor didn't give women more notice of the move to 66

National Loan Guarantee Scheme - 'Credit easing' to help stimulate growth


The Chancellor has delivered an astute political budget, and has finally been kinder to pensioners. He has not done anything for savers though!

Amid the economic gloom, with lower growth and rising unemployment, at least the worst predictions for pensioners have not materialised. They will receive the full September inflation uprating, which is only right given that pensioner inflation - on the official ONS measures - has been much higher than average national inflation. ONS pensioner inflation is running at over 6% and the poorest pensioners have suffered from the huge rises in costs of food and fuel. These form a large part of many pensioners' budgets and have caused enormous hardship for many of the oldest pensioners in particular.

State pension uprating - full 5.2% September cpi uprating:
The Basic and Second State Pension will both increase by 5.2% next April, so the Basic State Pension will rise from £102-15 to £107-45. The fears that the Chancellor would choose a lower cpi measure by averaging the inflation figures over a number of months have proved unfounded, which is good news for all those benefit recipients who have been struggling with the high levels of inflation all through 2011. That means that the 'triple lock' has been fully honoured. Of course, this is the first year that the uprating has been tied to cpi rather than rpi. Last year the Basic State Pension went up by rpi, while the Second State Pension increased only by cpi. This time, they will go up by the same amount.

Pension Credit to increase by more than earnings - extra £5-35pw is a 3.9% rise
Once again, the Chancellor has decided to increase the Pension Credit by the same monetary amount as the Basic State Pension. The statutory requirement is to increase Pension Credit in line with earnings, which would have been a 2.8% rise, but the poorest pensioners will now see a rise of 3.9% instead, as Pension Credit Guarantee Credit increases by £5-35 per week from £137.35 to £142.70.

But Savings Credit reduced to pay for extra uprating
Pension Credit comes in two parts, the Guarantee Credit and the Savings Credit. In order to fund the extra rise in the Guarantee Credit (i.e. an increase above earnings inflation) the Chancellor has decided to reduce the top level of Savings Credit. This is effectively transferring money from the poorer pensions with savings, to the poorest pensioners without any savings.

Nothing in the budget to help suffering savers
The Chancellor has failed to offer help for savers. The impact of high inflation coupled with low interest rates is a huge double blow for savers. Increasing the ISA allowances would at least help them earn their meagre levels of interest without being taxed as well. Negative interest rates are bad enough, without adding the tax insult to savers' injury.

State pension age increase to 67 starting in 2026
As life expectancy is rising it is inevitable that the state pension age will increase. Pension ages everywhere are rising. Today's announcement that Britain's state pension age will increase to age 67 starting from 2026 is not far out of line with other nations. Around that time, the US, Netherlands, Germany, Denmark and Spain will all be increasing pension ages to 67 and Ireland's pension age will be 68. It also does give people around 15 years' notice which is fair, however it is really quite scandalous that the Government refused to use some of the money saved to delay the original rise to age 66 that has just been passed into law. That change has hit hundreds of thousands of women very hard, denying them their state pension without giving them enough time to prepare for this change. They received between 5 and 7 years' notice of up to a one and half year pension age increase, which is clearly unfair.

Business Finance Partnership - using pension fund assets to fund growth
Government has agreed with pension funds to invest in infrastructure projects, 'British Savings for British Jobs'! This is a sensible idea and long overdue. UK economic growth needs boosting both short-term and long-term. There are hundreds of billions of pounds of assets sitting in UK pension funds - in fact we have more money in our pension funds than the whole of the rest of Europe put together. At the moment, these huge pools of long-term assets are being encouraged to pile into gilts. But gilt yields are at record low levels and do not offer sufficient returns even to keep up with inflation, let alone to keep up with rising pension liabilities. Therefore, pension funds urgently need new ways of earning good income - in particular they are looking for long-term stable, inflation-linked income. That makes infrastructure projects a potentially very attractive prospect for pension fund investments.

Credit easing - a damning indictment of our banks!
The £20bn National Loan Guarantee Scheme aims to help small firms (with turnover below £50m) to borrow at cheaper rates, for example 6% rather than 7%. This is welcome, but the fact that the banking sector has failed so abysmally to offer affordable loans to small businesses in the UK is a damning indictment of the banking system. And the problem is not just the cost of credit, but the availability of credit. Banks have not only failed to pass on the record low interest rates to small business borrowers. They have ratcheted up interest rates for small business loans and overdrafts and also increased charges substantially, as well as denying credit to many previously successful businesses as soon as they ask for extra loans to finance expansion or deal with customer delays. This 'credit easing' must therefore work better than bank lending so far. It is, nevertheless, welcome and if businesses can borrow at last at decent rates, this will help boost employment and growth. Small firms are the lifeblood of any economy and the sooner we can help them thrive the better.

Delaying auto-enrolment for small firms very sensible - will help reduce deficit as saves tax relief
It is very sensible for the Government to decide to delay the timetable for small first to comply with the automatic enrolment of all their staff into a pension scheme. The administrative burdens of auto-enrolment on small firms have been badly under-estimated and will pose a dreadfully time-consuming burden on small businesses. This is the last thing they need when grappling with low growth and struggling to either survive or expand. Forcing them to divert management attention to setting up automatic enrolment systems for pensions for their staff is not sensible until recovery is established. Of course, higher pension contributions will also cost the Treasury extra money in tax relief, so again it makes sense to delay the timetable for this reason as well.

A budget for borrowers not savers - when will we get some good news for savers?


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