Pensioners emerge as the big Budget 2012 losers
Chancellor George Osborne has been accused of introducing a stealth "granny tax" in Wednesday's Budget.
The Chancellor announced that the age-related personal allowance - which allows pensioners to have a larger income of tax-free cash than working people – is going to be phased out.
The allowance has been frozen at £10,500 for people who are over 65, or £10,650 for the over-75s. While people turning 65 in the future will see no increase in their personal allowance.
The move is expected to cost future pensioners an average of £285 a year, according to Treasury figures. It will affect up to five million older people who will pay an extra £3.3 billion in income tax over the next four years.
"This is an outrageous assault on decent middle-class pensioners," says Ros Altmann, director-general at Saga. "This Budget contains an enormous stealth tax for older people. There is nothing in this Budget for savers, there is nothing to improve the annuity market, nothing to appease the damage of quantitative easing and nothing to support ISA changes and shelter older people's money in cash. This Budget is terrible news for pensioners."
The tax-free personal allowance – which decrees how much we can all earn before we start paying income tax – is set to rise to £9,205 next year, and its believed that ministers felt it was no longer justifiable to give pensioners an extra allowance.
"The decision to freeze the age-related personal tax allowances effectively means around five million pensioner tax payers will no longer get additional reductions in their tax over the coming years - whilst those on the top rate of tax will see their bills reduced," says Dot Gibson, the general secretary of the National Pensioners Convention.
"Many older people will feel they are being asked to forego their reduction in tax to help out the super rich. There's no fairness in that."
The increased allowance for pensioners was originally introduced by Winston Churchill in 1925 in recognition of the fact that pensioners have lower average incomes and have paid tax all their lives.
Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central bank’s only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesn’t physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.