Budget highlights

Wednesday 23 March 2011

Budget Highlights

  • Nothing explicit for savers - but great news hidden away as NS&I certificates return
  • Very little for pensioners
  • £140 a week state pension for new pensioners only
  • Future state pension age rises linked to longevity
  • Public sector pensions to be career average, with higher contributions
  • Ending contracting out of pensions to save over £6bn a year
  • Ending contracting out of pensions to save over £6bn a year

1. What did the Budget do for Savers? On the face of it, nothing, but hidden away is great news!

National Savings will bring back inflation-linked certificates! The Chancellor's budget contained no good news for savers, warning of continued high inflation and boasting about low interest rates. Yet hidden in Annex B on page 90, there is a real gem. National Savings will bring in revenue of £2billion next year (Red Book, Annex B, p. 90). Previously the Government did not want NS&I to make much money and this will allow them to start issuing inflation-linked Savings Certificates and Bonds again, date to be confirmed. NS&I have today issued a Press Release confirming they plan to do this.

2. What does the Budget do for Pensioners? - very little!

In fact, there was disappointment for pensioners who were looking for some relief from rising inflation - the Chancellor confirmed that actually inflation will stay high for both this year and into next year. The suffering of savers and plight of pensioners in the current environment of high inflation and low interest rates was not even mentioned in his speech.

Over 65s tax allowance will be increased by rpi, not cpi.

The best news announced by the Chancellor for pensioners is that the over 65's special personal tax allowance will rise in line with rpi for the rest of this Parliament. While working age personal allowance is rising by £600 lifting 1.1million low paid people out of tax altogether, the personal allowance for the over 65s will just increase by rpi.

Merging income tax with National Insurance will not raise tax for pensioners.

The other piece of good news is that when the Chancellor merges income tax with National Insurance, he will exempt pensioners from the tax increase that they would otherwise face. National Insurance rates will be 12%, but pensioners are exempt from this. If the merger went ahead, basic tax paying pensioners would have faced a 60% tax hike from 20% to 32%. This will not now happen.

3. £140 a week state pension announced at last - very welcome

The Chancellor has announced that the DWP will be issuing a Green Paper on state pension reform, proposing a simple system in future, joining the Basic and Second State Pensions together in a flat rate state pension payment of at least £140 a week. This is a very welcome reform, although it will only apply to future pensioners. It will mean that future generations of pensioners will have a simpler pension, which will be of particular benefit to women and the disabled, who often have much less state pension than men, yet are more wholly reliant on state pensions.

4. Future state pension age rise linked to rising life expectancy - but current plans unfair

In future, the state pension age will keep on rising beyond 66, with the increase being linked to increasing longevity. This is sensible and offers the chance to save money on state pensions in future, however the timetable for speeding up the increase to age 66 is wholly unfair. This timetable needs to be rethought.

5. Strikes in public sector looming as a result of planned pension reforms

The Chancellor says he accepts Lord Hutton's Report and plans to increase public sector pension contributions by an average of 3%. Unions have already threatened to strike over plans to move from final salary to career average schemes - even thought these would offer better pensions to many women and lower earners. Government will now consult with unions on how to implement the changes - with details on how contributions will rise (presumably there will be exemptions for lower paid workers) and also details on accrual rates for the career average scheme. Even after the changes, public sector workers look set to retain very generous pension benefits.

6. Contracting out to be abolished - raising over £6bn a year

Following recommendations from the Office of Tax Simplification and in line with the agenda of simplifying the tax system, the Government plans to end the system of contracting out of state second pension. This is forecast to ultimately raise over £6billion every year. In the meantime, from 2012, the Government will reduce the contracting out rebates and this is going to save over £600m a year every year (Red Book, Table 2.1, line 25, p.42). It will also mean, however, that workers and employers who currently have contracted out pension schemes will have to pay higher National Insurance rates.'

7. Indexing direct taxes to cpi, not rpi, is a stealth tax raising over £1bn a year by 2015

By indexing direct taxes to cpi, instead of rpi, the Government plans to raise significant extra revenue. This is another stealth tax and this fiscal drag will raise around £2bn over the next 4 years. (Red Book, Table 2.1 line 23. p. 42).


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