Fiscal and monetary policies will leave Britain’s pensioners £11.5 billion out of pocket by the end of 2014, a new report published by the Saga Foundation reveals today.
The research examines the impact on Britain's pensioners of tax and benefit changes in the pipeline as well as rock-bottom interest rates and quantitative easing (QE) which are already biting.
The report, compiled for Saga by experts from the Centre for Economics and Business Research (CEBR), concludes that the changes will have cost pensioners an average of £1,318 by the end of the financial year 2013/14.
It estimates that two thirds of this is due to the impact of record-low interest rates and QE with the remainder due to fiscal measures such as the reduction in Winter Fuel Payments and the abolition of the Age Related Allowances, or so-called “Granny Tax”.
The report shows that 40% of single pensioners in the lowest income bracket are forced to rub by on £8,034 with couples having just £13,883 to make ends meet.
The median income of the next 40% of pensioners is £13,104 for single households and £23,998 for couples while even the “top” 20% typically take home just £20,332.
Dr Ros Altmann, Director-General of Saga, said: “Pensioners are being hammered. They didn’t cause our economic meltdown yet they have been paying a heavy price as we try to fix it and they face an even tighter financial squeeze in future. Those retiring now are the biggest losers in life’s pension lottery as tax and benefit changes will compound the misery wreaked by paltry savings rates, plunging annuity rates and overshooting inflation.
“Instead of pumping hundreds of billions of pounds into financial markets and bank balance sheets it would have been much better sending cheques to everyone to encourage them to spend.
“If older generations felt confident again, they would splash out and boost economic growth. If we keep cutting their income, these grey pounds will be wasted.”
The study also highlights how different types of pensioner households have been affected by the policies, with better-off couples losing up to £5,345, equivalent to a 13% fall in annual income.
In fact the biggest savers are the biggest losers as falling interest rates have taken a heavy toll on their investment income while pensioners have felt little, if any, benefit from the sharp drop in mortgage payments enjoyed by younger households.
Dr Altmann adds: “These are the people who have done the right thing, saving diligently for their retirement but now they are seriously suffering.
“This report contradicts conventional claims that pensioners have escaped unscathed from the impact of government measures designed to tackle the deficit.
“As so often, the devil is in the detail, but this analysis shows quite clearly that many pensioners are actually shouldering more than their fair share of the burden.”
Dr Altmann fears the impact of these policies will do yet more damage to the image and reputation of pensions, undermining confidence just as the government is poised to launch its flagship programme which will start automatically enrolling millions of workers into employer schemes.
The CEBR study concludes that 1.6 million people due to retire in the next two years will be amongst the hardest hit as scheduled changes to tax and benefits kick in.
- Changing the measure for State Pension increases from the Retail Price Index (RPI) to Consumer Price Index (CPI). The government has pledged to increase pensions by the highest of CPI, earnings growth or 2.5%. The coalition has made great play of its “triple lock” pledge but the state pension would actually be higher under the RPI formula used by Labour.
- Age-Related Allowances have been frozen in 2012 and are being scrapped for anyone retiring from next April. These changes will cost pensioners up to £193 a year, with middle incomes households hit hardest by this so-called Granny Tax.
- Cutting Winter Fuel Payments to pensioners by £50 a year, £100 for those aged over 80.
- Changes to Savings Credit which reduced the maximum payment by almost £2 a week to £18.54 for single pensioners and £3.36 for couples. The qualification threshold was also increased by 8.4% to £111.80 for singles and £178.35 for couples, excluding many altogether.
Dr Altmann said: “Our financial crisis was caused by too much borrowing. Banks, house-buyers - and the Government - took on debts they couldn’t afford and risked going bust. So interest rates were slashed to make borrowers’ repayments more affordable and the Bank of England created new money to push up inflation and devalue the debts.
“But the side-effects of these policies have punished pensioners. High inflation and rock-bottom interest rates have been acting like a tax increase and now they are facing further financial hardship from fiscal changes coming down the track.”