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Credit where it&#39s due

The jigsaw pieces in the Government&#39s plans to help today&#39s pensioners are slowly falling into place. Following the introduction of help with winter fuel bills, free television licences and the minimum income guarantee, the Pension Credit Bill has been given Royal Assent and this new credit will become part of our lives from October 2003.

There may be advisers who think that the pension credit will not affect them or the advice they give. This may be somewhat hasty. The Government estimates that around half of all pensioner households – over 5.3 million pensioners – will stand to gain something from the pension credit, meaning its net has been cast wide.

The idea behind the pension credit is simple – to reward modest savers. Currently, the minimum income guarantee provides an income safety net of £100 (at April 2003) for single pensioners and £154 for couples. But pensioners who have modest savings find income clawed back against the Mig on a pound for pound basis.

The pension credit will change this by awarding savers up to 60p in the pound of their private retirement income rather than them losing it all. Anyone whose retirement income is less than around £135 a week (£200 for couples) will qualify. The maximum credit is £13.80 (£18.60 for couples).

If their private income takes individuals over the £100 Mig, their credit will be reduced proportionally.

The pension credit is good news for today&#39s pensioners. From next year, they will have more money in their pockets. But they are just one side of the equation.

We also have to think about those who are saving for their retirement – tomorrow&#39s pensioners.

They will have had moderate earnings all their life and paid (at most) basic-rate income tax. It is doubtful whether they will be encouraged to save by a credit that will claw back the equivalent of higher-rate tax on their pension in retirement.

We should also think about how the new credit will interact with other (valuable) state benefits. There is no point saving for your retirement if it means that your entitlement to, for example, housing benefit will be affected.

Fortunately, the Government considered this angle and both housing benefit and council tax benefit will be increased to offset the effect of the pension credit. This ensures that these pensioners maintain their current entitlement.

The other prickly subject is how much savings does a pensioner have to have before they count when establishing their level of benefit. Currently, those who have capital above £12,000 are disqualified from getting any help and those who have smaller savings are assumed to earn a massive 20 per cent return on them. This will now change.

All pensioners, regardless of the level of their savings, will get some help if their retirement income qualifies them for the pension credit plus any savings below £6,000 will be disregarded.

For bigger sums of capital, the level of assumed retirement income will be set at £1 a week for every £500 of savings above £6,000, equating to a notional return of 10 per cent a year.

Although this lower assumption is an improvement, it is still high. At a time when interest rates are low and stockmarkets plummeting, I would be very interested to find out where I could earn such a high return on my savings.

Maybe an example would help demonstrate how the pension credit works. Mrs Smith is a widow and has a private pension income of £15 a week. She has savings of £9,000, which are assumed to earn an extra £6 a week income.

Currently, as Mrs Smith has her own – albeit modest – private income, she will only get an additional £2 a week to bring her income up to the Mig of £100.

This is the same level of income as next-door neighbour Mrs Jones will get despite the fact that Mrs Jones has made no private savings. But this position is set to improve. From October 2003, Mrs Smith will get an additional £12.60 a week. (See table).

So, what do all these chan-ges mean for advisers? Well, the obvious impact is to consider whether it is in modest-earning individuals&#39 best interests to save for their retirement taking into consideration their probable retirement income.

When doing this, do not forget to include capital disregard levels. As the return on any savings below £6,000 will be ignored when working out retirement income, individuals who believe that they will be eligible to get the pension credit may be better off choosing to pay initially up to £6,000 into an Isa.

This way, any savings will not reduce their pension credit entitlement. Once this limit has been reached, the decision can then be made whether to pay into a pension.

There is no doubt that the pension credit will help today&#39s pensioners get a boost to their retirement income and ensure that tomorrow&#39s pensioners will at least benefit from any private income.

However, whether the loss of 40p in every pound sends out a strong enough message to save for their retirement is another matter entirely. But the effect of the pension credit conundrum will be too widely felt for advisers to simply ignore it.

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