How the Budget Affects Your Pension

How the Budget Affects Your Pension

by Rebecca Hall on 30 Mar, 2011

The 2011 budget has brought in some significant changes for pensioners. Unfortunately none of them particularly good. The primary ‘giveaway’ of the budget was raising the personal tax allowance to a total of £8,105, but by April 2012, but this makes little difference to pensioners already enjoying an allowance of £9,490 (£9,640 for those 75 and over).

Winter Fuel Benefit
The biggest hit for poor pensioners will be the removal of the winter fuel ‘top-up’ introduced three years ago to help pensioners with rising domestic fuel bills. The winter fuel benefit still stands, but it means that those over 80 will receive £100 less and those over 60, £50.

Whilst it is an understandable cut given its introduction as a temporary measure, it has to be said that now doesn’t seem like the right time to remove it, given that energy bills have certainly not fallen, and in many cases have actually risen, particularly thanks to high oil prices.

Needless to say, this will be a huge blow to pensioners who struggle to meet energy bills during the winter months.

One of a Chancellor’s best tricks for raising ‘stealth taxes’ is to switch which inflationary measure they use. Inflation is measured by either the Consumer Price Index (CPI) or the Retail Price Index (RPI), with the RPI generally measuring around 1% higher than the CPI (reporting inflation using the CPI is also a classic ‘things aren’t as bad as they seem’ manoeuvre).

Up until now, tax allowances that automatically rise with inflation, such as ISA allowances, Capital Gains Tax and the income tax threshold, have measured inflation using the RPI. From April 2012, the government will use the CPI.

Analysts estimate the Treasury should gain at extra £1bn by 2015-16 with this move.

The good news for pensioners is that certain allowances, including the age-related allowance, will continue to be tracked against RPI for the life of the parliament. The bad news is that state pensions will be tracked against CPI from April.

State Pension
Aside from the new mechanism to raise the state pension age in line with life expectancy, Osborne is also introducing a new flat-rate pension, thought to be around £140 a week. This has been broadly welcomed, removing the familiar minefield of means testing and allowing people to plan for retirement more effectively by knowing what they will get from the state.

The bad news is that this won’t affect those already drawing their state pension.

For existing pensioners, the budget is pretty disappointing; particularly with regards to the winter fuel benefit. For those currently working, the rise in retirement age may feel like a blow but is actually pretty fair, and the flat rate pension will certainly help in planning retirement.

About the Author

Rebecca Hall

Rebecca Hall worked as an independent mortgage adviser for 10 years before turning to financial journalism full time. She has strong links to the CAB advising families on mortgage refinancing.