Monday, 26 March 2012

Forget the Granny Tax

The Granny Tax is what they're calling the Chancellor's decision to freeze that extra lump of tax allowance people over 65 get (about £3,000 a year, a bit more for the over-75s.)

But you should forget that; it's not the big pension story. To start with it only affects "grannies" by the amount indexation would have increased the allowance; so negligible effect this year, a tad more next year, and so on.

No, the real story is the second state pension. This used to be called SERPS, was then called S2P, and in the future will be called No Such Pension! That's because Osborne is abolishing it. He's going to uprate the basic pension instead. So the deal goes something like this: instead of a basic pension of £120 per week plus a second state pension related to the amount you paid in over your working life, and could be as much as £100pw, you'll just get £140pw instead. Ouch! Of course if your earnings-related element is low you could actually be making a profit on the deal, but for most people the new combined pension is going to be less than the two pensions would have been separately.

Apart from one group of people that is! You see, it has for a long time been possible to opt out of the second state pension and have the government pay your contributions into a private fund. In fact at this exact moment in time, it is still possible. To clarify - there are people out there with funds as high as £100,000 entirely paid for by the government handing back some national insurance contributions. These people will get the new enhanced basic state pension PLUS they get to keep any pension derived from this private fund. So we could be approaching a situation where someone retiring is either in clover or screwed depending on whether they decided to trust the government or not on a particular day 40 years ago when they made their pension decisions. (Hint: the right answer was not to trust the government!)

However, we don't know the detail on the closing down of SERPS/S2P yet. It's possible they may keep some earnings-related element covering the transition period (that period being the last 40 years or so!) so people who have made some SERPS/S2P contributions will get some additional benefit for it. Consultation documents are expected in the next few months. This situation bears close watching and is the next big scandal coming down the line.

It must be noted that in his budget the Chancellor reiterated his intention of merging tax and NI. This would simplify the tax system considerably - it's the one big thing chancellors have been mooting but never quite doing for decades. However if you're going to do the merge you do need to remove the pension-related-to-NI-contributions structure of the tax system. So this change needed to happen. However it should be done fairly, and not be used as an excuse to claw extra money from pensioners - but since when could chancellors resist clawing extra money from anybody? (I'll answer that, it was the Tory government of the 1980s and early 90s.)

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