View the article online at http://citywire.co.uk/money/article/a576837
Lorna Bourke: what next for pensions?
Now that Osborne has launched his covert raid on pensioners, what else might he have up his sleeve?
Lorna Bourke answers a reader's pension question, and makes some predictions on the new 'single tier' pension.
Tax grab on pensioners
The Budget tax grab on pensioners, dubbed the ‘Granny Tax’ has made us all wonder: what next for pensions? If Osborne is prepared to impose a £3.3 billion tax penalty on over-65s, dressing it up as tax ‘simplification’, what else might he do?
£3.3 billion is the saving to the exchequer over the next four years of freezing age allowance until it comes into line with the standard personal tax allowance.
As reader Neil Devine puts it: ‘I'm not a pensioner yet, but I will become one (God permitting) by mid 2013. I’m unsure when the flat-rate pension of £140 per week will be introduced, but my pension forecast already shows my pension will be £140 per week based on the superannuation contributions I made throughout my working life. Whilst not begrudging anyone receiving the new flat-rate pension when it is introduced, it does pi55 me off that I've earned that sum while it is just being handed to others. I don't suppose my pension will be increased because of the contributions I made – does anyone know?'
Nothing is likely to happen before you reach retirement age next year, so you should retire with whatever state pension you have earned through your national insurance contributions, including contributions to earnings-related top-up pensions such as the current S2P, its predecessor Serps and earlier graduated contributions – even if by then your pension exceeds £140 a week.
'Single tier' pension
In his Budget speech the chancellor said that he would publish a paper ‘in the spring’ on the new ‘single tier’ pension, which would provide people with a basic state pension above the level of means testing. This would be achieved by combining the second tier pension with the basic state pension.
He also confirmed that at today’s prices it was likely to be around £140 a week. Crucially, he made no mention of what will happen to state earnings-related pensions already in payment and those earned and paid for but not yet in payment.
Until that paper is published, we have no information of when the new single-tier pension will be introduced, although it is likely to be towards the end of this parliament in 2015 when the reform of means-tested benefits, limiting them to a maximum of £26,000 a year, becomes effective.
This will also coincide with the introduction of auto-enrolment into company pension schemes. The chancellor confirmed that the new flat rate pension will be ‘contribution based’.
Uncertainty on top-ups
Neither do we have any details of what will happen to earnings-related top-up pensions, which have been earned but are not yet in payment. The most likely outcome is that contributions and accruals of the second tier pension will be frozen and the new flat rate pension of £140 a week paid to new pension claimants as they reach retirement.
We don’t know whether Osborne will honour the top-up pension benefits earned in excess of £140 a week – although there will be a huge public outcry if he seeks to grab this excess, given that millions of people have taken this higher pension into account when saving for retirement.
It is inconceivable that he would retrospectively take back earnings related pensions already in payment, although he might freeze any future inflation linked increases as he has done with age allowance. This will gradually reduce the real value of these top-up pensions as their spending power is eroded by inflation.
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