Pensioners got a lot of attention in this year’s Budget. On the surface, it appears members of the older generation will get: paid by the state to look after their own grandchildren; a pension rise to counteract falling interest rates; and early access to higher limits on tax-free savings account.
It all sounds like great news, doesn’t it? Unfortunately, a closer glance reveals that, while older people might end up a little better off for the Budget, they’re hardly raking it in.
Paid to babysit?
Rumours about this Budget windfall started to circulate some days before Alistair Darling took his little red box to the House of Commons. Apparently, in return for looking after your own grandkids, the government was going to give you money.
Fantastic. Grandparents have been looked upon as a free childcare service for years, and finally their efforts were going to be rewarded. But unfortunately for granny, the reality is somewhat less exciting.
The reality is that from April 2011, grandparents who are of working age (under 65) who give up work to look after any young grandchildren (under 12) for more than 20 hours a week will receive National Insurance (NI) credits to help increase their state pension.
NI credits are given out to replace the NI contributions that the grandparents would have been making if they had been working. Over a working lifetime, NI contributions build up and decide the level of state pension you will receive.
The change is a good thing and has been welcomed by campaign groups. “We warmly welcome the introduction of the grandparent National Insurance credit,” says Sam Smethers, chief executive of Grandparents Plus in The Times. “We know that working age grandmothers on low incomes are the ones who are most likely to be providing that childcare. Until now they have done so with the risk that they could miss out on a full basic state pension.”
However, anyone who is actually working would still be better off simply using part of their wages to help their kids pay for childcare if necessary, rather than giving up their pay packet to help out. And as for those grandparents who are already above retirement age, I’m afraid this change doesn’t help you at all.
A state pension boost to make up for falling interest rates
The Budget also announced a boost to state pensions through an increase to the Pension Credit savings limit. The pension credit is a benefit that tops up a pensioner’s weekly income to try to ensure that no pensioner is living on less than £130 a week (or £198.45 for couples).
A pensioner’s means-testable weekly income includes interest from any savings they have, excluding the first £6,000 of savings. You are assumed to get £1 a week extra for every £500 of capital you have saved. The more income you have the less credit you will receive.
Because the collapse in interest rates has hit pensioners particularly hard, Darling has increased the savings limit from £6,000 to £10,000. This means that any interest you earn on up to £10,000 of savings won’t be included in your assessment for pension credits. This will put an average of £4 extra a week into 540,000 pensioners’ pockets, said Darling.
But what he has failed to do is address the ridiculous “assumed income” calculation. As noted above, this suggests that pensioners are getting £1 a week for every £500 in savings they have. But that’s an annual interest rate of roughly 10% – savings accounts earning even half that are impossible to come by these days.
Perhaps more to the point, many pensioners still don’t claim the Pension Credit because they are either unaware of it, or they simply find the idea of being means-tested humiliating and intrusive. Help the Aged and Age Concern (which merge this month) reckon that up to £2.8bn a year in Pension Credit goes unclaimed. This change won’t help them. Overall it would be better to scrap the credit altogether and simply raise the basic state pension to the level seen as the minimum necessary.
Darling gives the over-50s a whole £9 savings bonus
Last Wednesday, Darling also announced in his budget that he was upping the Individual Savings Account (Isa) limits, to £10,200 with £5,100 allowed to go into a cash Isa.
While the majority of the population won’t get to enjoy this boost to their tax-free savings until next April, the increase is valid from 6 October this year for the over-50s.
The increase is good news for savers, but it’s a shame that Mr Darling didn’t bring the change in immediately. The six-month head start for the over-50s is pretty pointless. On a cash Isa rate of 3%, an extra £1,500 saving will gain just £22.50 over the rest of the tax year, points out Carolyn Steppler of KPMG. That’s a tax saving of a whole £9 for a 40% taxpayer.
And even that rate may well be unattainable. Current rules mean savers can only open one cash Isa per tax year. So come October, savers will only be able to top up their existing Isa. Banks and building societies are not obliged to match their current Isa savings rates so many may pay “two-tier’ rates, with the top-up amount getting a smaller interest rate. “Providers will see this as captive business and some will take advantage of the situation,” says Kevin Mountford of Moneysupermarket.com in the Financial Times.
But the details of the Isa top-ups have yet to be sorted out, so here’s hoping the government will allow the extra allowance to be put in seperate Isas so the providers have to offer competitive rates.
Overall, with inflation still higher for retired people than the young, and interest on savings accounts entirely negligible, these measures aren’t going to go far to compensate pensioners for income lost elsewhere. The main reason they’re there, a cynic might suggest, is to stave off criticisms that, by slashing interest rates and printing money, the Government is bailing out the indebted at the expense of older savers.
• This article is taken from our weekly MoneyWeek Saver email.
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