House of Commons - Explanatory Note
State Pension Credit Bill [HL] - continued          House of Commons

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Clause 3: Savings credit

70.     Clause 3 specifies the conditions that must be satisfied (in addition to the two "common conditions" described in connection with Clause 1) if the claimant is to be entitled to savings credit (subsections (1) and (2)). It then goes on to explain the calculation for determining the amount of savings credit to which a claimant is entitled (subsections (3) and (4)).

71.     The condition of entitlement in subsection (1) is that the claimant has attained the age of 65 or is a member of a couple the other member of which has attained the age of 65.

72.     The condition in subsection (2) has two parts, each concerned with aspects of the claimant's income.

73.     The first part (paragraph (a)) requires that the claimant has what is referred to as "qualifying income" of an amount that exceeds a figure referred to as "the savings credit threshold".

74.     "Qualifying income" is addressed by subsection (6), which confers power to make provision by regulations as to income which will be "qualifying income". The intention is that the claimant's "qualifying income" will, broadly, be those parts of the claimant's income which arise from:

  • contributing to the National Insurance system (for example, a Category A or Category B retirement pension, including additional pension);

  • the claimant's own retirement provision (for example, an occupational or personal pension, or income from capital).

75.     The "savings credit threshold" is a prescribed amount (see the definition in subsection (7)). The amount prescribed is expected to be around £77 in 2003 for a single person and £123 in the case of a couple.

76.     Savings credit is, however, to be subject to a maximum entitlement, referred to as "the maximum savings credit" (defined in subsection (7)), which is a prescribed percentage (the intention is that it will be 60 per cent) of the difference between:

    (a) the standard minimum guarantee (discussed in the Notes on Clause 2); and

    (b) the savings credit threshold.

77.     The maximum savings credit is therefore expected to be around:

  • £13.80 in the case of a single person (60 per cent of the difference between £100 and £77); and,

  • £18.60 in the case of a couple (60 per cent of the difference between £154 and £123).

78.     If the claimant has income in excess of the appropriate minimum guarantee, the savings credit will be adjusted by deducting a prescribed percentage (the intention is that it will be 40 per cent) of the amount by which the claimant's income exceeds the appropriate minimum guarantee.

79.     The effect, based on estimations for 2003, is that normally the savings credit is reduced to nil in the case of a single person if the claimant's income is £135 or more and in the case of a couple if the claimant's income is £201 or more.

80.     The second part of the condition of entitlement in subsection (2) (paragraph (b)) reflects the provision for reducing the amount of savings credit in circumstances where the claimant has income in excess of the appropriate minimum guarantee. The Clause provides that there is no entitlement to savings credit where the claimant's income is such that the adjustment has the effect of reducing the savings credit to such an extent that none is payable. The same calculation therefore serves to determine both entitlement to, and the amount of, savings credit.

81.     Subsections (2)(b) and (3) together produce the above results by providing that the amount of the savings credit to which a claimant is entitled is the amount by which "amount A" exceeds "amount B" (subsection (3)) and that there must be such an excess if the claimant is to be entitled to savings credit (subsection (2)(b)). The claimant is not entitled to savings credit unless amount A exceeds amount B.

82.     Amount A and amount B are defined in subsection (4), but to find their amount involves some further calculation. The following amounts (all of which have been described either in the Notes on Clause 2 or in the preceding Notes on this Clause) must be found in the case of the claimant:

    (1) the amount of the "income";

    (2) the amount of that income which is "qualifying income";

    (3) the "appropriate minimum guarantee";

    (4) the "standard minimum guarantee";

    (5) the "savings credit threshold"; and,

    (6) the "maximum savings credit".

83.     From those amounts two further amounts that need to be known can be calculated:

    (7) a prescribed percentage (expected to be 60 per cent) of the amount by which:

        (a)     the qualifying income,

      exceeds

        (b) the savings credit threshold, and

    (8) a prescribed percentage (expected to be 40 per cent) of the amount (if any) by which:

        (a)     the claimant's income,

      exceeds

        (b) the appropriate minimum guarantee.

84.     Subsection (4) defines "amount A" and "amount B".

85.     Amount A will always be amount (7), unless that amount exceeds the maximum savings credit, in which case amount A will be the maximum savings credit.

86.     Amount B will be amount (8) in any case where the claimant's income exceeds the appropriate minimum guarantee. In any other case, amount B will be nil (and the amount of savings credit to which the claimant is entitled will accordingly be amount A without any reduction).

87.     Clause 2(6) makes provision for a prescribed amount to be substituted for the reference to the standard minimum guarantee in Clause 2(3)(a). Where that happens, the claimant's appropriate minimum guarantee will normally be less than if it included the standard minimum guarantee instead of the prescribed amount substituted for it.

88.     That has consequences for the calculation of amount B. Where the appropriate minimum guarantee is replaced by virtue of Clause 2(6), a smaller amount of income will be sufficient to exceed the appropriate minimum guarantee and bring the adjusted amount B into operation.

89.     It is not, however, intended that, simply because of the application of regulations under Clause 2(6), the claimant's savings credit should necessarily be subject to that extra degree of adjustment in all cases where those regulations apply, so subsection (5) confers power by regulations to substitute for the appropriate minimum guarantee a prescribed higher amount, but only for the purpose of finding the amount (8) described above.

90.     The effect of such a substitution is that the amount (8) described above, and accordingly amount B, will be less than it would otherwise be, or will become nil, and so a smaller amount B falls to be set against amount A.

91.     Subsection (8) confers the power to prescribe nil as an amount. This would be used as now in the case of members of religious orders who are fully maintained by their orders and for prisoners.

92.     Subsection (8) will be exercised to substitute "nil" for the reference to the maximum savings credit in cases corresponding to those in paragraphs 7 and 8 in Schedule 7 to the Income Support (General) Regulations 1987 where a nil amount is prescribed. That Schedule prevents prisoners, and members of religious orders who are fully maintained by their orders, from receiving Income Support. See also paragraph 55 above.

93.     Annex C to these Notes contains worked examples of the operation of the rules for determining the amount of a claimant's savings credit

Clause 4: Exclusions

94.     Clause 4(1) provides that Pension Credit shall not be payable to or for a person who is a member of a married or unmarried couple if the other member is entitled to Pension Credit. The intention here is simply to prevent double provision from public funds.

95.     Subsection (2) provides that someone who is subject to immigration control within the meaning of section 115 of the Immigration and Asylum Act 1999 will have no entitlement to Pension Credit.

96.     Subsection (3) carries forward into Pension Credit the power in section 134(4) of the Social Security Contributions and Benefits Act 1992. The intention is that Pension Credit is not to be paid if entitlement is under ten pence a week, unless payment can be combined with payment of another benefit.

Aggregation

Clause 5: Income and capital of claimant, spouse etc.

97.     Clause 5 provides that any income or capital of the claimant's partner, whether or not they are married, is treated as the income or capital of the claimant for the purposes of the Pension Credit income assessment. This includes the assessment of the guarantee credit (at Clause 2) and the savings credit (at Clause 3). In effect this means that the income of a couple, whether married or unmarried, is added together for the purposes of calculating how much Pension Credit they will receive.

98.     This will be the case except in circumstances to be prescribed by the Secretary of State in regulations. For example where a partner receives income from a trust, or capital is held in trust, for a third party who is not part of the income assessment unit; or similarly, where the partner is the appointee or holds power of attorney for the financial affairs of a third party who, again, is not part of the assessment unit.

Clauses 6 to 10: Retirement provision

99.     The social security system requires claimants to notify changes that affect their benefit entitlement. In the case of Pension Credit, this would include any change in income that is taken into account when calculating the rate of Pension Credit. Clauses 6 to 10 provide for certain types of income (a person's "retirement provision") to be treated as remaining the same for a period of up to five years ("the assessed income period"). This is subject to routine adjustment for inflation. The effect of this provision is that increases in income do not affect Pension Credit entitlement and therefore do not have to be reported by the claimant during that period. However this does not prevent an increase in the rate of Pension Credit where a person's actual retirement provision is reduced.

100.     A person's retirement provision is any income from a pension (other than one payable under the Social Security Contributions and Benefits Act 1992 or the Social Security Contributions and Benefits (Northern Ireland) Act 1992), annuity or capital (see Clause 6(6)). Income from a particular source is referred to as an "element" of retirement provision.

Clause 6: Duty to specify assessed income period

101.      The system in Clauses 6 to 10 can only be used once a claimant attains age 65 or the claimant's spouse or partner attains that age (see subsections (3)(c) and (4)(c)).

102.     If the Secretary of State makes a decision on the claimant's entitlement to Pension Credit and Pension Credit is payable, he must specify an assessed income period in relation to the claimant (see subsection (1), (3) and (4) and also the exceptions in subsections (2) and (3)(d) and Clause 9(2)). The decision might be the first decision made in relation to the claimant, or it might be a decision revising or superseding an earlier decision (see subsection (3)(b) and sections 8(1), 9 and 10 of the Social Security Act 1998), including a decision on appeal that Pension Credit is payable (subsections (4) and (5)).

Clause 7: Fixing of claimant's retirement provision for assessed income period

103.     Specifying an assessed income period has the effect of fixing, for that period, what is to be treated as an element of the claimant's retirement provision (see subsection (3)). Further elements of retirement provision acquired later in the assessed income period are simply disregarded (see subsection (5)). The claimant need not, therefore, report such a further element during the period.

104.     Specifying a period also fixes the amount the claimant receives from each element of his retirement provision (the "assessed amount"), but those assessed amounts are liable to be adjusted in accordance with regulations (see subsections (3) and (4)). The intention is that the regulations will provide for the amount of income from a pension or annuity to be deemed to increase from time to time in line with the terms of a claimant's pension or annuity arrangements and for the rate of return on capital to be treated as adjusted from time to time. In some cases, the assessed amount may be deemed to stay the same.

105.     The amounts a claimant is deemed to receive and the amounts actually received may differ. If that works in the claimant's favour, he need not report it during the period. The point of subsection (3) is that a calculation based on deemed amounts does not give rise to an overpayment. If the difference works against the claimant, he may seek a new decision on the amount of his entitlement (see Clause 8(1)(a)).

106.     None of the powers in the Bill will affect the powers in section 9 of the Social Security Act 1998 which allow the revision of a decision.

Clause 8: Fresh determinations increasing claimant's entitlement

107.     Where the initial decision is superseded by a decision under section 10 of the Social Security Act 1998, and that decision increases the claimant's Pension Credit entitlement, the assessed income period can continue. It can also continue where the supersession decision reduces Pension Credit entitlement but the reduction is less than it would have been because the amount of another element of income has also been re-determined (see subsection 2).

108.     Where the assessed income period does not end, the elements of the claimant's retirement provision (other than the element whose change caused the increase in Pension Credit entitlement) continue to be as they were initially fixed and so do their assessed amounts. As for the element whose change caused the increase in Pension Credit entitlement, it is treated for the rest of the assessed income period in the same way as the elements fixed by the initial decision (see subsection (3)).

109.     The result is that if a claimant wants the Secretary of State to look again at his Pension Credit entitlement because, for example, part of his retirement provision has gone or yields him less income, subsections (2) and (3) allow the Secretary of State to take that change into account without re-examining what the claimant receives from any other part of his retirement provision.

Clause 9: Duration of assessed income period

110.     The Secretary of State will not always specify an assessed income period and sometimes he may specify a period of less than five years. This happens if he considers, looking at the claimant's circumstances for the 12 months following the day on which the decision on entitlement takes effect, that the elements of the claimant's retirement provision and their amounts on that day are not likely to be typical. (See subsections (1) and (2)). Foreseeable increases in retirement provision (of the sort dealt with in Clause 7(4)) would not be treated as making a claimant's retirement provision atypical (see subsection (3)).

111.     An assessed income period may end prematurely. It will always end, except in prescribed circumstances, if: the claimant marries, divorces or separates or the claimant's spouse or partner dies; or if the claimant is a member of a couple and one of them, who was not 65 when the assessed income period was initially specified, attains that age. (See subsection (4)). It may also end at other times or in other circumstances, to be listed in regulations (subsection (5)). An example would be where the claimant or partner starts work. (The fact that an assessed income period has ended prematurely does not necessarily mean that a person's entitlement to Pension Credit has ceased.)

Clause 10: Effect of variations under section 7(4)

112.     The provision in Clause 10 resembles the routine adjustment provisions in sections 159 and 159A of the Social Security Administration Act 1992. Unlike those sections, which are open-ended, this provision operates only while an assessed income period is in force (see subsection (1)).

113.     Any adjustment in the assessed amount of a claimant's retirement provision which is made by regulations under Clause 7(4) can give rise to an increase or reduction in the claimant's Pension Credit (see subsection (2)). If there is no net effect, a claimant's Pension Credit simply continues at the same amount (see subsection (3)). In any case, there is no need for a new decision by the Secretary of State and there is continuity in the claimant's entitlement to Pension Credit.

Clauses 11 to 14: Miscellaneous and supplementary

Clause 11: Administration

114.     Clause 11 introduces Schedule 1, which makes amendments to the Social Security Administration Act 1992 and the Social Security Act 1998 so as to apply, in the case of Pension Credit, the normal social security rules for claims, decisions and appeals.

Clause 12: Polygamous marriages

115.     Clause 12(1) describes, for Pension Credit purposes, the conditions that shall apply in order for a person to be treated as being in a polygamous marriage.

116.     Subsection (2)(a) confers the power for regulations to prescribe the circumstances in which a member of a polygamous marriage is entitled to Pension Credit.

117.     Subsection (2)(b) and (c) confers the power for regulations to prescribe the level of award of Pension Credit, which may include an amount payable in respect of the second and any subsequent spouse.

118.     Subsection (2)(d) provides for the aggregation of income and capital of all members of a polygamous marriage for the purposes of determining entitlement to Pension Credit.

119.     Subsection (3) allows regulations under this Clause to modify the Bill itself.

Clause 13: Transitional provisions

120.     Clause 13(1) confers power to make regulations in connection with the introduction of Pension Credit in 2003.

121.     Clause 13(2) provides that, in particular, regulations may treat people aged 60 and over who are receiving Income Support immediately before the introduction of Pension Credit as having been awarded, or having made a claim for, Pension Credit. This will remove the need for them to make a separate claim and provide continuity in payment. Also, where an assessed income period of five years would otherwise apply to a person who has reached the qualifying age when Pension Credit is introduced, the regulations will allow for a longer period to apply. This is to avoid the operational problems which could otherwise occur in 2008.

Clause 14: Minor and consequential amendments

122.     Clause 14 introduces Schedule 2. The amendments of existing legislation in that Schedule are discussed below.

Clauses 15 to 17: Interpretation of State Pension Credit provisions

123.     Clauses 15 and 16 define what is meant by income for the purposes of the Bill. Clause 15 confers regulation-making powers, which will allow the Secretary of State to define how a person's income and capital are to be calculated and attributed for the purpose of determining entitlement to the guarantee credit and the savings credit. Clause 16(1) contains the definition of "retirement pension income". Clause 16(2) confers power to make regulations varying that definition.

Clause 15: Income and capital

124.     In Clause 15, subsection (1) defines income for the purposes of the Bill.

  • Paragraph (e) includes a regulation-making power which enables the Secretary of State to prescribe those social security benefits that are taken into account in the assessment.

  • Paragraph (f) enables further regulations to prescribe the foreign social security benefits that are to count as income. The intention is that this will include any social security benefit paid by the government of a country outside the United Kingdom that is analogous to any of those prescribed under paragraph (e).

  • Paragraph (g) brings in war disablement pensions and war widow's or widower's pensions (see the definitions of these terms in Clause 17(1)), while paragraph (h) brings in their foreign equivalents, paid by governments of countries outside the United Kingdom (again, see the corresponding definitions of these expressions in Clause 17(1)).

  • Paragraph (j) enables regulations to be made bringing in other descriptions of income. It is intended that this power will be used to cover income streams which few pensioners have, such as employers' sick pay or matrimonial maintenance payments. In the future, the power might be exercised to bring new types of income into account.

125.     Subsection (2) confers power to make regulations to define how capital holdings will be taken into account in calculating Pension Credit. Capital will be deemed to have an assumed rate of return for purposes of assessing entitlement to the guarantee credit and savings credit. The intention is that a ten per cent rate of return will be applied to capital that exceeds £6,000 (£10,000 in cases of people in residential care and nursing homes). Capital below this amount will not be taken into account in the assessment.

126.     Subsections (3) and (4) provide regulation-making powers to prescribe how income and capital will be assessed. The subsections provide that income accrued during any period will be calculated in line with prescribed rules. It is intended that the rules will provide that income may be averaged. In averaging income for fluctuating earnings, for example, the Secretary of State may take an average for a past and current period and apply it to a future period.

127.     Subsection (6) confers the power to make regulations prescribing how income and capital will be treated in certain situations. The intention is that regulations will reproduce for Pension Credit the limited income and capital disregards provided for in the Income Support (General) Regulations 1987 (S.I.1967) such as that which applies to charity work expenses for example. It is also intended that existing provisions in the Income Support (General) Regulations 1987 concerning deprivation of income and/or capital will be used for Pension Credit. Thus, for example a claimant may be treated as having a notional income from capital no longer in their possession if they have disposed of the capital solely or mainly to secure or increase entitlement to Pension Credit.

Clause 16: Retirement pension income

128.     In Clause 16, subsection (2) allows the Secretary of State to use regulations to add to, vary or remove the descriptions in the list of retirement pension income in subsection (1). This power provides the Secretary of State with the flexibility to change the scope of the scheme where it is appropriate to do so. It will, for example, allow the list of retirement pension income to be amended so that it remains relevant and reflects any future legislative change in pensions and other financial products that provide an income in retirement.

Clause 17: Other interpretation provisions

129.     Clause 17(1) contains definitions of expressions used in the Bill.

130.     Subsection (2) confers the power to prescribe in regulations the circumstances in which persons are to be treated, or are not be treated, (a) as members of the same household or (b) severely disabled. In practice questions whether persons are members of the same household arise in only two cases:

  • the determination of whether two people are a "married couple" (see the definition in Clause 17(1)); and,

  • the determination of whether the conditions in Clause 12 (polygamous marriages) are satisfied in any particular case (see subsection (1)(c) of that Clause).

Effect of guaranteed minimum pension on social security benefits

Clause 18: Equal treatment for widows and widowers

131.     Clause 18 amends section 47(1) of the Pensions Schemes Act 1993, which sets out when section 46(1) of that Act applies to the widower of an earner. Section 46(1) provides for the amount of certain state retirement, widow's and bereavement benefits to be reduced by the amount of any guaranteed minimum pension also received from a private pension scheme.

132.     Paragraph (a) provides for section 46(1) to apply to a widower who receives widowed parent's allowance.

133.     Paragraph (b) provides for section 46(1) to apply to a widower who is entitled to a retirement pension based upon his wife's contributions, or who would be so entitled were it not for the provisions in section 43(1) of the Social Security Contributions and Benefits Act 1992. These provisions prevent an individual from receiving more than the full amount of retirement pension available to a single person.

Final provisions

Clause 19: Regulations and orders

134.     Clause 19 contains supplementary provision relating to the regulation and order making powers conferred by the Bill.

135.     It applies to Pension Credit the usual regulation-making powers provided for social security benefits by subsections (1), (2) to (5) and (10) of section 175 of the Social Security Contributions and Benefits Act 1992. These provide that:

  • regulations and orders shall be made by the Secretary of State;

  • orders or regulations shall be made by statutory instruments;

  • the power may be exercised in relation to all cases, all cases subject to specified exceptions or only for specified cases;

  • the power may be exercised fully or not, make the same provision for all cases or not, and specify conditions or not;

  • regulations may be made for such incidental, consequential or transitional provision as appear to be suitable;

  • the power to make regulations or an order includes power to provide for a person to exercise discretion when dealing with any matter.

136.     Subsection (2) provides for the first regulations made under specified provisions of the Bill to be subject to the approval of each House of Parliament. This includes regulations that:

  • set the amounts to be paid as the guarantee credit (as defined in Clause 2);

  • set the amount of the standard minimum guarantee (as defined in Clause 2);

  • define the cases in which a prescribed amount may be substituted for the standard minimum guarantee;

  • set the percentage of the excess qualifying income used to calculate the savings credit;

  • set the percentage of the excess income used to calculate the savings credit;

  • prescribe cases in which a prescribed higher amount may be substituted for the appropriate minimum guarantee when calculating the savings credit;

  • define the income which will enable a person to qualify for a savings credit;

  • prescribe the amount of the savings credit threshold;

  • define the minimum amount payable;

  • provide for the treatment of people who are polygamously married;

  • provide for the treatment of income and capital in the calculation of Pension Credit.

137.     Subsection (3) provides that any regulations under the Act which are not subject to the "draft affirmative" Parliamentary procedure described in subsection (2) are subject to the Parliamentary "negative resolution" procedure.

 
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Prepared: 26 February 2002