From the TUC

No cap for state pension spending – it already has one!

26 Jun 2013, by Guest in Pensions & Investment

The new cap on welfare spending will not, says George Osborne, apply to expenditure on the state pension. Some will welcome this move, not least because, as the Chancellor almost said, those aged above state pension age are highly unlikely to be able to replace lost benefit income (or nominally lost expected benefit income) by seeking to increasing their income from employment.

But it is worth keeping in mind that state pension expenditure already has a cap, of sorts. And many other pensioner benefits, including those providing vital income top-ups to keep pensioners out of poverty, will be subject to the spending limit.

The Pensions Bill currently working its way through Parliament proposes the introduction of a new ‘single tier’ state pension. It would have been very odd if the Chancellor had hamstrung this reform by introducing automatic mechanisms for slashing the new benefit from the word go (although this seems to be exactly what he is doing with Universal Credit).

Expenditure on the new state pension is already constrained, however, by the principle of ‘cost neutrality’. The government does not want single tier to cost a penny more than the old state pension system – indeed it will cost less than the old system over the long-term.

This need for cost neutrality has led to some unfortunate aspects of the proposals, such as raising the NICs qualifying years required for a full state pension from 30 to 35 years. It also means that the initial rate of single tier has been set at a very low level, £144 per week – I have written here about how this decision fundamentally undermines several of the laudable objectives of single tier.

It also means that the ‘triple lock’ of inflation, earnings or 2.5% indexation, in place now to protect state pension payments, will be removed.

The UK spends considerably less on state pensions than most comparable countries. State pension reform was an opportunity to look not only at the structure of our system, but the resources we put into it – the promise of exempting state pension spending from the welfare cap will sound rather hollow to the pensioners struggling on poverty-level incomes in the future.

Furthermore, those struggling future pensioners may well be dependent on claiming means-tested benefits such as Guarantee Credit, Council Tax Benefit and, most importantly, Housing Benefit to keep themselves out of poverty – it seems spending on all of these benefits will be automatically limited by the plans announced today.

The spending review has also cut a couple of pensioner benefits in a more direct sense. The ending of Winter Fuel Payments to pensioners living in hot countries (there is something slightly surreal about making benefits subject to a ‘temperature test’, but of course we already have this in the UK for the Cold Weather Payment) will get the most headlines. While superficially it is hard to defend pensioners living on the Costs del Bravo receiving help with their fuel bills, in reality Winter Fuel Payments have been used for many years to top up contributory state pension benefits.

Less attention will be received by the ending of the ‘assessed income period’ for Pension Credit. It is a bizarre decision (explicable only in the sense that it saves the Exchequer some cash) arising from the same mindset behind the cruel introduction of a seven-day waiting period before people can claim unemployment benefits. They want to make it harder to claim the benefits to which we are entitled and, in many cases, desperately need.

The government thinks that this change will save as much as £45 million per year from 2017/18 – not an inconsiderable sum given the unemployment benefit waiting period, which will cause significant hardship to many households, will bring in only £260 million from the same year.

The assessed income period means your entitlement to Pension Credit is fixed for five years. If your income changes – which in theory could lead to a lower benefit award – within the five year period, you do not have to tell DWP. This policy is vital to reduce complexity within the means-tested benefit system for pensioners – an extremely complex system marred by low take-up rates. The system is about to get even messier because the Pensions Bill will effectively end ‘passporting’ between different benefits. And the now spending review has made it messier again.