Feature

posted 26 Sep 2001 in Volume 6 Issue 6

The new Pension Credit

By Alan Robinson Legal and Welfare Rights Training

In the last issue of ECA Mervyn Kohler drew attention to some of the benefit and allied changes for people of pension age. This article considers the proposed Pension Credit which is due to come into effect in 2003. The government announced in the Queen’s speech that a bill would be introduced but at the time of writing this has not happened and what is said below should be read subject to the Pension Credit Bill when it is eventually published.

In recent years one of the ways in which the government has sought to provide for those of pension age has been through increases in income support for pensioners. Income support for pensioners has now become known as the minimum income guarantee (MIG). It works by topping up the income of the pensioner to a common level (the minimum income level) consisting of a personal allowance for a single person or a couple together with a premium. The three pensioner premiums that the system formerly used remain in place depending on age or disability but the amount of all three is now the same.

The level of the MIG has increased sharply over recent years so that whereas the state pension for a single person is now £72.50 a week and for a couple £115.90 a week the MIG is set at £92.15 for a single person and £140.55 for a couple. As the state pension withers on the vine being increased only in line with prices the MIG is increased in line with earnings.

This should not be a surprise to those who have followed the government’s benefit policy in recent years in particular the Welfare Reform and Pensions Act 1999 with its increased emphasis on means tested benefits and its erosion of contributory and non-contributory benefits. However there are well-established and understood problems with means tested benefits not least their complexity and the stigma which often goes along with them causing many people especially older people to refuse to claim income support to which they are entitled.

One of the regular criticisms directed at income support is that it penalises those who make provision for themselves. This happens in two ways. The first is by way of the capital rules. People with more than the maximum amount of capital are simply not entitled to claim; those with capital below the cut-off point but above a certain level are deemed to receive income from their capital at a level that is determined by the amount of capital they hold rather than by reference to any actual income that it produces. Such additional deemed income (known as tariff income) is offset against the MIG entitlement to reduce the amount payable.

The second criticism is that actual as well as deemed income is offset against entitlement. Thus if a person has made some provision for him or herself by way of a private or company pension the weekly amount of this pension is deducted from the means tested benefit payable.

Both of these criticisms are addressed in the Pension Credit proposals. As a step along the way the capital cut-off for income support for those not in residential care (previously £8 000) was increased to £12 000 with effect from 9 April 2001 where the claimant or his or her partner (or both) is 60 or over.

For the same group the tariff income is introduced at £6 000 rather than at £3 000 as previously. These are merely steps towards the introduction of the Pension Credit when it is proposed that the capital and tariff income rules should be abolished altogether for a claimant who is or whose partner is over 60.

The question of private provision is also addressed in the new proposals. Instead of deducting the amount of any private provision such as an occupational pension or part-time earnings from benefit the claimant will be paid an additional amount of benefit to be precise 60p for every £1 of additional income.

The effect of this is illustrated in the table. The figures are extracted from the consultation paper (CM 4900) produced by the government that outlined the new proposals. It proceeds from an assumption that the state retirement pension in 2003 will have advanced to £77 for a single person and £123 for a couple; and that the level of the MIG will be £100 for a single person and £154 for a couple. For a single person with state pension only total weekly income will consist of that pension plus a MIG top-up of £23 totalling £100. Someone who has additional income through private provision of £1 a week will receive an additional 60p a week giving a total income of £100.60. This increases to a maximum credit of £13.80 for those with private provision totalling £23 a week at which point their entitlement to MIG will run out. This gives them a total income of £113.80. Once the combination of state pension and personal provision rises above the level of the MIG the level of credit begins to diminish from £13.80 at the rate of 40p for every extra pound until at the level of £135 a week neither MIG nor credit is payable.

Similar rules apply to couples with the anticipated state pension set at £123 and the MIG at £154. At these levels no Pension Credit is payable. At £124 60p credit is payable. The maximum amount of credit is £18.60 for a couple with non-pension provision of £31 a week and diminishes to 20p with a total income of £201 per week (additional provision £78).

The existing capital cut-off rules will be abolished altogether (although it is not clear what will happen for those in residential care) together with the tariff income rules. The consultation paper refers to rewarding people for their savings by paying an extra 60p for every pound of income from savings. Presumably those with both savings and other income will still be subject to the maximum credit figures quoted above.

The consultation paper also makes clear that additional income includes earnings. The paper is less clear on some other aspects of the proposed scheme notably the relationship with housing benefit and council tax benefit. The position of those with entitlements over and above the basic MIG for example those entitled to the Severe Disability Premium is also less than clear they will be ‘rewarded for their saving’ (and presumably their additional income though this is not stated).

The other feature of the new proposal that is worthy of mention is that awards will be made for a fixed period rather than the present payments that can fluctuate weekly. It is proposed to introduce a fixed term award similar to the way in which Working Families Tax Credit is currently paid. The paper says “one option would be an initial award at the point of retirement fixed for at least a year but rolled on unless there are material changes of circumstances such as the death of a spouse.”

The new proposals do not as they stand offer a system that is free of problems. For example it is very laudable to reward those who are earning by paying them extra credit but what happens to earnings disregards? Take the example quoted in the consultation paper that of John (see box).

TABLE – single person

(note state pension in all cases £77)

Extra Total MIG Pension Total

private income top-up credit income

income pre-MIG

£1 £78 £22 £0.60 £100.60

£2 £79 £21 £1.20 £101.20

£5 £82 £18 £3.00 £103.00

£10 £87 £13 £6.00 £106.00

£20 £97 £3 £12.00 £112.00

£23 £100 £0 £13.80 (maximum) £113.80

£24 £101 £0 £13.40 £113.40

£30 £107 £0 £11.00 £118.00

£40 £117 £0 £7.00 £124.00

£50 £127 £0 £3.00 £130.00

£57 £134 £0 £0.20 £134.20

£58 £135 £0 £0 £135.00

John is aged 70 and single. He has a basic state pension of £77 a week. He also gets a weekly wage of £20 for some part-time work. The Pension Credit would top his income up to the guaranteed minimum income of £100 a week and give him a further savings top-up of 60p for every £1 he gets from his employer an additional £12 a week. His total Pension Credit would be £15.00 and his total income would be £112.00.

The problem can be seen if we add another variable to the case study namely that John receives the mobility component of Disability Living Allowance. This gives him an entitlement to the higher pensioner premium (HPP) as part of his income support (MIG). Income support levels no longer differentiate between the three pensioner premiums so his income support level is the same whether he gets the HPP or the ordinary pensioner premium but what the HPP does give him is an entitlement to an earnings disregard of £20. Using the illustrative figures for state pension and MIG his income now (ignoring mobility component) is therefore £77 state pension plus £23 MIG (because his earnings are disregarded) plus £20 earnings a total of £120. There is a poverty trap here which will bite unless some form of earnings disregards are incorporated into the new scheme.

Furthermore judgement on the new scheme must be reserved until the way in which it will operate with regard to housing benefit can be seen. One of the identified problems of the Working Families Tax Credit was that the extra income was offset for someone in rented accommodation by the fact that 65 per cent of it was deducted from the housing benefit payable. The same potential problem can be identified with the Pension Credit. It is all very well paying John in the above example an extra £12 a week but if this is to be offset with a deduction of £7.80 from his housing benefit it looks less attractive.

The new proposals deserve to be acknowledged for their attempt to grapple with some of the longstanding issues associated with the payment of benefit to older people but they also leave a lot to be desired. Mervyn Kohler rightly puts the Pension Credit into its proper context when he draws attention to “the mighty administrative problem of drawing half our retired population some 5.5 million people into the means tested system”. This may itself create further problems. Ever since the welfare state was introduced we have been bedevilled by governments who introduce piecemeal reforms without considering their knock-on effects. If the Pension Credit is an example of joined-up government well and good but it might be well to await the detail before hailing it as a new dawn for retired people.

Alan Robinson

Legal and Welfare Rights Training

Tel: 01724 710 819