Pensioners are the biggest losers from George Osborne's latest budget.
George Osborne said in his Budget speech that "no pensioner will lose in cash terms" from today’s proposed changes to income tax.
Strictly speaking, that’s correct. If a pensioner’s income is unchanged, he won’t have to pay any more income tax. But once you take inflation into account, pensioners will lose out. In fact, pensioners are the biggest losers from the budget.
Income tax
Under current rules, pensioners don’t pay any tax on income up to £10,500 a year. That’s a higher allowance than for younger folk, but the bad news for pensioners is that the allowance is now going to be frozen. So as prices rise, the real value of the allowance for pensioners will fall.
Indeed the Government thinks that this freeze will boost revenue by £360 million in the year to April 2013, rising to £1.25 billion in 2016. That’s a healthy boost to revenue which will help pay for the Government’s Corporation Tax cut.
I suspect this is going to be the issue that will really annoy people over the next few weeks. There’s already a fair bit of fuss on Twitter. Check out the #GrannyTax hashtag.
State pension age
And the Government isn’t just hurting current pensioners, today’s budget will also hurt people who retire in the future. That’s because the state pension age is set to go up.
It’s true that future increases to the pension age have been announced in previous budgets, but today’s news is that the Government wants to introduce an automatic review of the pension age.
In other words, if average UK life expectancy rises, the state pension age will go up in line with that increase. As a result, people who are 33 now may not be able to retire until they reach 73, according to Andrew Tully of MGM Advantage.
Pushing up the pension age in line with life expectancy may sound reasonable but it ignores the fact that life expectancy for poorer folk may not rise as fast.
What’s more, even if life expectancy does rise uniformly across the population, that doesn’t mean that manual workers will be physically able to carry on doing their jobs until they reach 73.
I think you can make a decent case that increases in the pension age discriminate against poorer pensioners.
Universal pension
The other big change is that the Government plans to introduce a ‘universal pension’ in 2015, which will apply to anyone who retires from that date onwards.
The State Second Pension (S2P) will be abolished and all new pensioners will receive a state pension of £140 a week at today’s prices. That’s as long as the pensioner has paid National Insurance for at least 30 years.
The big advantage of the Universal Pension is that it won’t discourage saving. It doesn’t matter how much money you have in the bank, you’ll still get £140 a week. It will also makes things simpler.
So, in principle, I’m in favour. However, the devil will be in the detail, and it’s possible that some pensioners with a State Second Pension may end up with a lower income. I’ll keep a watching brief on this issue.
Anyway, even if the universal pension does prove to be good news for all future retirees, you can’t say that this Budget has been good news overall for pensioners. That’s a shame.
Postscript: I should have said that I was pleased to see that the Chancellor hasn't made any changes to higher rate tax relief for pension saving. Maybe he was persuaded by my article: Tax raid could cut your pension by £3000 a year. Or maybe not.
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