What did Gordon do for you?

Mr Brown, the Chancellor, attempted to pacify disgruntled pensioners and other special-interest groups with a series of proposals in the pre-Budget report on Wednesday. John Willcock and Katherine Griffiths take a closer look
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The Independent Online

Pensioners benefited perhaps even more than fuel protesters from Chancellor Gordon Brown's pre-Budget report on Wednesday, although he didn't go as far as many "grey power" campaigners wanted. We outline below Mr Brown's plans to increase the basic state pension by twice the rate of inflation, improve the means-tested top-up for pensioners, and to introduce new rewards for people who save for retirement.

Pensioners benefited perhaps even more than fuel protesters from Chancellor Gordon Brown's pre-Budget report on Wednesday, although he didn't go as far as many "grey power" campaigners wanted. We outline below Mr Brown's plans to increase the basic state pension by twice the rate of inflation, improve the means-tested top-up for pensioners, and to introduce new rewards for people who save for retirement.

There was also important news for PEP and ISA investors. And Mr Brown threw in some other sweeteners. Free TV licences worth £104 for the over-75s and Christmas bonuses will both be maintained, and the winter fuel allowance will be increased from £150 to £200 for every pensioner household. This should benefit more than 11 million people, he said.

The Chancellor announced a cash rise in the basic state pension of £5 a week for a single person and £8 for a couple. He also said the pension would rise by a further £3 the following year for an individual, and by £4.80 for a couple. This is the first time the state pension has increased faster than inflation or earnings in 20 years.

Mr Brown said that he had rejected the idea of a flat rate for pensioners since this would favour the better off. For those aged 45 today, for every £6bn extra paid out on pensions by the Government, £2bn would go to people on incomes of £20,000 and above, leaving less money available for those on middle and low incomes.

Instead the Government is increasing the means-tested top-up allowance, the Minimum Income Guarantee (MIG), from next April, as well as introducing an entirely new Pension Credit in 2003 (see below). Over 2 million people will benefit from the increase in the MIG, said Mr Brown.

Mr Brown said that the current MIG rate of £78.45 will rise to £92.15 from next April, making a total payment of £700 a year. When the new pension credit scheme is introduced in 2003 the MIG will be worth £1,000, and "every year after that MIG will increase in line with earnings," the Chancellor said. Pensioners will be able to claim their new payments by phone, he added.

Pension Credit

Pensioners with modest savings will no longer miss out on Government assistance with their weekly income under a new system that will be introduced in 2003.

The scheme, called a Pension Credit, will boost the income of single pensioners who live on up to £135 a week and couples on up to £200. This group, who currently do not receive the MIG because they have some savings, even if their income is low, will now not be penalised.

Alistair Darling, Secretary of State for Social Security, announced the details of the scheme the day after the Chancellor's speech, saying: "There is a fundamental fault in the system. Saving should be rewarded, not punished. The Credit will reward the thrift of millions of people who have worked hard to save for their retirement."

The Credit, which should help 5.5 million pensioners - about half of the pensioner households in the UK - will benefit people with modest occupational pensions and those who still work and earn a small amount. It is expected that two thirds of those who will gain will be women, as they tend to have smaller occupational pensions than men.

The new payments will be awarded according to what level of income you get from your savings, not on the basis of how much your total savings are. For example, a person with a basic state pension, estimated at £77 a week for 2003, will be raised to £100 with the MIG. On top of that, if the pensioner also has an occupational pension of £20 a week, he or she will receive a £12 credit for the saving. This will create a total weekly income of £112.

This contrasts with the current situation where the MIG works like a 100 per cent tax on those with savings: for every £1 you have saved, you receive £1 less of MIG. The Pension Credit is designed to let you keep 60p of that £1.

The Credit is intended to underline the Government's policy of encouraging saving and persuading people to rely less on state provision for old age.

For pensioners of the future, the good news is that the Credit will be linked to increases in earnings and should dovetail with stakeholder pensions, which are intended to offer low-cost private pensions to many people on moderate or low incomes.

Legal & General, which will supply a large number of stakeholders when they launch next April, predicted that the Credit will solve the problem of encouraging people to save.

Adrian Boulding, director of pensions strategy at Legal & General, said: "Before the Pensions Credit came along there was always a question over whether people earning around £10,000 would be better off simply relying on the MIG. The Credit removes this concern by ensuring that people who save what they can toward their own retirement will always benefit from their savings."

The Credit is also part of the Government's initiative to make the pensions system more simple. Although final plans have not been finalised, it is likely that a pensioner who qualifies for the Credit will receive it on the basis of an assessment when they retire, then one ten years later. At the moment pensioners on benefit have a weekly means test, which is highly unpopular with many people.

Saving and investment

The £7,000 maximum limit of contributions in tax-free individual savings accounts (ISAs) was extended for another five years, and rules governing personal equity plans (PEPs) were simplified.

The news on ISAs will come as a relief to ISA providers and savers, as Gordon Brown had previously threatened to reduce the ISA limit to £5,000 a year. ISAs will also be opened up for the first time to 16 and 17-year-olds, who will be able to invest in a cash ISA, which is capped at £3,000 a year. While many under-18s are still in full-time education and don't pay tax, the Government has estimated that around 100,000 teenagers who are working will benefit from being able to save in ISAs.

Halifax, which already has over 1.4 million cash ISA customers, is even more optimistic. Welcoming the Chancellor's decision, the Halifax said that there were 675,000 young people aged 16 or 17 in employment in the UK who could benefit from opening a cash ISA. The bank also said that more people took out ISAs with the Halifax in the first three months of their existence (April 1999 to July 1999) than took out TESSAs with them during their entire first year.

The Chancellor also created new opportunities for PEP holders. PEPs, which were replaced by the more popular ISAs last year, are currently restricted to European stocks. Mr Brown said they can now be invested in shares listed outside the European Union. The move will put PEPs on the same footing as ISAs, which are not restricted in this way.

Jason Hollands, deputy managing director of Best Investment, said the move will give PEP investors the chance to put their money into some strongly-performing shares that are currently off-limits.

He said: "Investment markets are highly globalised and many of the largest and most successful companies are quoted outside the European Union. It makes no sense to discourage investors from benefiting from the opportunity offered by such companies."

PEPs were also made easier to administer by allowing investors to make changes to their fund over the phone. Previously they had to put instructions in writing.

Peter Shipp, chief executive of the PEP and ISA Managers Association (PIMA), welcomed the plans for ISAs, but said he was disappointed that the Government had not allowed an amnesty for those who unintentionally broke ISA regulations last year by exceeding the amount of the fund which can be invested in cash or shares. Under the ISA rules, you can put up to £3,000 in cash and £1,000 in life insurance, with the remaining £3,000 in shares. Alternatively, you can put the whole £7,000 in shares. Mr Shipp said: "You have to wonder whether the rules need to be as complicated as they are."

Mike Warburton, senior tax partner at the business adviser Grant Thornton, echoed the view, saying: "It was a missed opportunity to reform and simplify ISAs."

Polarisation

The Treasury also launched a plan to change the rules governing the sale of financial products in a bid to increase consumer choice.

Under the proposals, any company will be able to sell a stakeholder pension or kite-marked ISA that is provided by any other company. This is a break from the current rules, which allow companies only to sell their own products.

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