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Clause 29

Personal Allowances for 2003–04 for those aged 65 or over

Question proposed, That the clause stand part of the Bill.

Mr. Flight: The clause, as hon. Members are aware, raises the question of age-related personal allowances. I want to draw attention to two issues, aspects of which I am not sure that the Government have fully taken on board. As a result, many pensioners with an income below the national average will have no benefit whatever from the increased allowances. In particular, almost 1 million with modest pensions for which they have saved for years, and whose earnings are about 75 per cent. of national average earnings, will be short-changed.

The first issue is that the restrictions clawing back the age-related allowances are not being indexed or increased. The Government have failed to point that out, as one might have expected. As the Committee will be aware, if a retired person's taxable income exceeds £17,900 per annum, he or she loses £1 of age-related personal allowance for every £2 of income above that sum. Those with an income of £21,980 per annum have no age-related allowance. Those who still qualify for the married allowance are in a similar position, as that allowance will not increase.

8.45 pm

Why are the Government not increasing the level at which the age-related personal allowance is clawed back? Surely it is wrong for pensioners with incomes below the national average wage to have their personal allowances restricted, especially when the Government have made so much of wanting to do their best for pensioners.

The second issue on which I want to concentrate is that of certain forms of insurance saving. Again, the Government make their point about wanting to increase pension saving and people's savings for old age, but when people cash in United Kingdom-based with-profits income bonds, the sum realised is treated as income for tax purposes even though those involved may not have any immediate tax liability because they are only standard rate taxpayers. The effect is that people with modest incomes will lose their age-related allowances for the year in which they realise those savings for their old age.

As I have said, pensioners with incomes of £21,980 have absolutely no additional allowance, yet their incomes are £1,000 below the national average. As Age Concern has said, many older people with modest incomes will not benefit from the higher age allowances, yet the expenditure of people in retirement is often increasing faster than the rate of inflation. The 10 per cent. council tax increase—it is often considerably more—has hit pensioners quite hard. Obviously, pensioners may have to pay nursing home costs for themselves or for their partners or spouses, and those costs are rising substantially faster than the rate of inflation.

I object to the Government's making a great noise as usual in saying what wonderful things they are doing for pensioners, given that, as with last year, many people in the middle and pensioners with incomes below the national average will not benefit at all. The arrangements

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have been structured in a sufficiently devious fashion so that they will receive no increase in their personal allowances in 2003–04.

Will the Government consider whether it is reasonable, in principle, for the threshold at which the age-related personal allowances are withdrawn to be indexed, together with other personal allowances? If we really want people, especially the vast bulk of people in the middle, to save more for their old age—we all know the Government's target for the ratio of public to private pension provision to swing from 60:40 to 40:60—tax rates in retirement are material.

I repeat the essential point, but I also ask the Paymaster General whether the Government have focused on the fact that many in retirement who are not enjoying large pensions will not benefit from the much-boasted, double-inflation increases in age-related allowances. Was that the Government's intention, or is it an oversight? Why did the Government not consider increasing the ceilings at which the age-related personal allowances are withdrawn?

Mr. Edward Davey: In part, I want to support what the hon. Member for Arundel and South Downs (Mr. Flight) just said. Many of his points were valid, particularly his point about the need—he did not say it in these words, but it was the implication—to top-slice relief for people who cash in insurance bonds, as they often exceed the age-related allowances and are hit unfairly. I very much agree with him in that respect.

I want to focus on age-related allowances as they affect married couples. There is room for a very modest measure to be introduced in Committee or in next year's Budget—this is an early Budget representation for next year—to sort out the allowances for married elderly people to make them less complicated. Currently, there is a difference in the married couples allowance for people aged 65 as opposed to those aged 75. It is a small difference, but it seems odd that there should be two different allowances for those two different groups of pensioners. It creates an unnecessary complication, and, by spending tiny amounts of money, the Government could level up the age 65-to-75 allowance to the higher rate for those aged 75 and over. That would achieve simplification and benefit some pensioners in a small way. I put that down as a marker, as the Government could consider such a proposal in the Standing Committee or in next year's Budget.

The clause itself is welcome. The fact that the age-related allowance is being increased over and above indexation is welcome, just as the failure to index the personal allowance for those under 65 was not welcome. I should have thought that the clause would receive support on both sides of the Committee, but there are several other smaller measures, as the hon. Member for Arundel and South Downs and I have tried to suggest, that the Government could consider to push in the same direction as the clause.

Dawn Primarolo: The clause increases the pensioner allowances for those who are 65 and over. It complements our policy of tackling pensioner poverty and rewarding those pensioners on modest incomes who have saved a little for their retirement. From April, the poorest

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households, who are on the minimum income guarantee, are at least £20 a week better off—over £1,000 a year in real terms—compared with 1997. We will increase, throughout this Parliament, the minimum income guarantee in line with earnings, which means that the poorest pensioners will share in rising prosperity thanks to the Government's successful handling of the economy.

In addition, from October 2003 the pension credit will replace the minimum income guarantee and provide pensioners with a guaranteed minimum income of at least £100 a week for single pensioners and £154 for couples. It will reward those whose second pensions, savings or earnings give them income of up to about £135 a week for single pensioners or £200 for couples. We have also increased the basic state pension beyond the rate of inflation. For a single pensioner, the rise will be £3 a week this April and that is on top of £5 increase last April. In 2003, the full basic state pension will increase by at least £100 for single pensioners, and in the future it will always increase by at least 2.5 per cent.

As I have already said, we are setting the winter fuel allowance payment at £200 for the rest of this Parliament. There is also additional help for households with someone who is aged over 75. They will continue to receive free television licences.

On taxation, in the last Parliament we increased pensioner allowances beyond inflation, very much recognising the point that was made in earlier debates about pensioners being on fixed incomes and facing other pressures. We then created and extended the 10p tax band. However, we wanted to do more for those pensioners who pay tax. In 2003–04, we will increase the pensioner allowance to £6,610 for someone aged 65 to 74 and by another £240 over indexation for those who are over 75. That will come to £6,740 on current forecasts.

The higher allowances will benefit 1.4 million pensioners and will take about 170,000 of them out of tax altogether. The basic rate pensioner taxpayer will gain up to £85 per year and we will subsequently increase the allowances at least in line with earnings for the rest of this Part. As one would expect, that is very much in line with our manifesto commitments.

The hon. Member for Kingston and Surbiton (Mr. Davey) raised an issue that he has raised powerfully in the House on several occasions. He referred to the importance of continuing to look critically at the way in which the tax system affects pensioners and of considering every opportunity, as we have done, to remove pensioners from the tax system whenever that is possible. When the tax system impinges on their income, we should continue that quest. I am therefore happy to accept the hon. Gentleman's representations for next year's Budget in the spirit in which they were offered. In particular, he identified the issue of the married couples allowance, which was protected for those over 65 when the Government removed it in a previous Budget as we prepared the way for the tax credits.

Adam Price: I would like clarification. If I understand it correctly, both pensioner age groups—the 65-to-74 cohort and those aged 75-plus—have been over-indexed, but they have been dealt with slightly differently by the Bill. A precise figure is stated for the 65-to-74 group, but indexation-plus applies to the other group. Will the Paymaster General explain the reason for that?

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