After hard-up, hard-working families, pensioners are the group that are being hit by George Osborne’s tax changes.
It is not obvious: the rhetoric, as for working families, is that the Tories support pensioners who have ‘done the right thing’ all their lives. That they trust them to know how to spend their own money in the best possible way and support them in wanting to pass on their money to their children.
It is persuasive rhetoric – and one that Labour needs to counter. These change are set to hit those who ‘did the right thing’ and will favour some of the most well-off. To identify the gap between Osborne’s rhetoric and reality, it is worth following the money.
First, there is what amounts to a windfall tax on pension pots. The ‘pension freedoms’ launched by the chancellor are on a par with council house sales as something that Labour can ill-refuse. Arguing that government knows better how to spend people’s money is about as politically stupid as arguing that council tenants should not be able to buy their own homes. Especially when low returns fuelled hatred of compulsory annuities.
Almost a quarter of a million pensioners have taken advantage of the new rules, providing, according to latest figures, a windfall of £1bn income to the Treasury. Many people may not have spotted that most of their drawdowns would be liable to income tax, in some cases at the higher tax rate, and that there would be a knock-on effect on spouses’ pensions.
Those most likely to fall foul of this are the people with hard-won pension pots built up over a lifetime of hard work on modest pay – like the people I previously represented in Northampton North. These are also people who would not normally expect to find themselves treated as high-income earners with their precious pension pots taxed at confiscatory rates.
Frank Field’s work and pensions select committee scrutiny will shine a welcome light onto the reforms which the committee has warned could be the next big mis-selling scandal.
Next up is inheritance tax. At present an estimated 19,000 estates are liable for the tax, which the Fabian Society has recently said should be abolished. Something that Osborne would claim he has at least partially achieved.
Not so. His most important change has been to freeze the current £325,000 threshold for at least four years, a measure that industry sources estimate will bring another 100,000 estates into the inheritance tax net each year, yielding, according to the most recent Treasury figures, nearly £2bn a year extra for the government by 2020.
The much talked-about £1m threshold applies to property only. The group that clearly benefits from the inheritance tax reforms are those who have £1m tied up in their family home.
So we have a measure that is a large amount of spin and which most assists the most well-off.
A third hit has been changes to the savings element of pension credit which, like the rest of the tax credit family, is a fiendishly complex benefit. However, it provided a supplement to pensioners who had done the right thing, worked all their lives, saved for the future, but still did not have enough for their retirement. An estimated 1.7 million pensioners were hit by the first tranche of changes. The most recent changes save the Treasury about £130m a year for each of the next five years. Hardest hit are likely to be women pensioners who will lose amounts of money that seem small to the chancellor but make a big difference to people struggling on a budget.
It is easy to dismiss Osborne’s pension reforms as being all about higher-income pensioners. Not so. They will impact on those hard-working people who do all the right thing and for whom Labour should press for safeguards in old age.
As chair of Progress Alison McGovern MP wrote recently, Labour needs to be calling the chancellor out on the decisions he has actually made, not attacking the caricature. That way the Tories really will be put under proper scrutiny.
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