THE EQUATION THAT SANK IAIN DUNCAN SMITH

The Secretary of State for Work and Pensions Iain Duncan Smith resigned on 18 March, two days after the Chancellor delivered his Budget which included another major cut in the benefits paid to disabled people.

In his resignation letter Duncan Smith said

"I have for some time and rather reluctantly come to believe that the latest changes to benefits to the disabled and the context in which they've been made are, a compromise too far. While they are defensible in narrow terms, given the continuing deficit, they are not defensible in the way they were placed within a Budget that benefits higher earning taxpayers."

The cut in the Budget was specifically set out in para. 2.76

• "changing the way that entitlement to Personal Independence Payment is determined – a reduction in the number of assessment points awarded for needing to use an aid or appliance to carry out two of the ‘daily living’ activities assessed. This will take effect for new cases and re-assessments from January 2017."

And the Prime Minister's reply to Iain Duncan Smith's letter of resignation says that the change was agreed by all.

"That is why we collectively agreed – you, No 10 and the Treasury – proposals which you and your Department then announced a week ago."

The equation
The savings from this change were around £1.3 billion a year. They were matched almost pound for pound by two items of spending. 1. raising the threshold at which higher rate tax began from April 2017 by £2000 to £45,000. 2. Cutting the rate of tax on capital gains made from selling shares, businesses and other items.

In 2019/20 the savings from cutting PIP were given as £1.3 billion and the cost of cutting those two taxes was estimated to be £1.235 billion. It was this use of the PIP savings to which Iain Duncan Smith objected. The table below sets out the annual costs and savings and the total over the five year period 2016/17 to 2020/21. They match closely.

	2016/17	2017/18	2018/19	2019/20	2020/21	2016/17 to 2020/21
SAVINGS
Cuts to PIP	£15m	£590m	£1,190m	£1,300m	£1,280m	£4,375m
SPENDING
Raise higher rate threshold	£0	£365m	£595m	£565m	£600m	£2,125m
Cut Capital Gains Tax rates	£105m	£630m	£605m	£670m	£735m	£2,745
Total SPEND	£105m	£995m	£1,600m	£1,235m	£1,335m	£4,870m

Source: Budget March 2016 Red Book Table 2.1, lines 5, 28, 73. pp.84-85.

The cancellation of the cut in the Personal Independence Payment leaves the Budget with this tax cut spend of nearly £4.9 billion but no offsetting saving of £nearly £4.4 billion. How this gap will be filled remains to be seen. Iain Duncan Smith's successor as Secretary of State, Stephen Crabb, will be asked to find a way. 

Higher rate threshold

Raising the income at which higher rate tax is paid will benefit people with a taxable income of more than £43,000 from 2017/18. That is about one in seven income taxpayers. The gain from the Budget change will be £200 in the year. The total gain from changes to the threshold between 2015/16 and 2017/18 will be £441.50. About 4.7 million people will benefit. Additional rate taxpayers, with an income of more than £150,000, will also gain, paying £80 less tax as a result of the Budget change and paying £81.50 less tax in 2017/18 than in 2015/16. About 335,000 people will benefit from that.

These figures assume that the limit for paying the lower 2% rate of NICs will also rise with the higher rate threshold. The lower earnings limit where NICs begin has not been announced for 2017/18 or beyond and it is assumed it stays the same. It will rise with inflation but that will make very little difference to the totals.

Capital Gains Tax

The rate of tax charged on gains from Budget day is cut from 28% to 20% for higher and additional rate taxpayers and from 18% to 10% for basic rate taxpayers. Sales of residential property are exempt so the gains will mainly be made from the sales of shares and businesses. The number of people who pay CGT is in the region of 200,000. Not all of them will benefit. 

The total gains on which CGT is charged were £30 billion in 2013/14. About a fifth of that (18%) is from residential property which the new rates will not apply to. If the new rates apply to the whole of the rest then the tax loss would be about £1.9 billion. But the Treasury says it will be only £630 million implying that it will only apply to around £8 billion of gains. At the moment I cannot reconcile those numbers. Perhaps you can do better with these latest CGT figures.

Personal Independence Payment

This benefit replaces what was called Disability Living Allowance. It pays between £21.80 and £139.75 a week depending on the degree of disability. The qualifying conditions for Personal Independence Payment (PIP) are much tougher than those for Disability Living Allowance (DLA). As people are reassessed many of them lose their payment or get a lower one. 

The planned change was announced on 11 March and would tighten the conditions further by halving the number of points allocated for needing aids for cooking, eating, and using the toilet. Halving the points would reduce the PIP paid, in some cases to nothing. Around 640,000 people would be affected. The Institute for Fiscal Studies estimates that 370,000 would get less money, costing them on average £3500 a year each. It would affect new claimants, existing claimants of DLA as they are moved to PIP, and existing PIP claimants who are reassessed or whose circumstances change. 

The change was due to start on 1 January 2017 but now will not do so. 

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19 March 2016

FLEXIBLE STATE PENSION

Should women born in the 1950s who face a steep rise in state pension age be allowed to draw a reduced pension early?

State pension age was raised from 60 for women born 6 April 1950 or later first to 65 to equalise it with men and then in parallel with men rising to 66 for anyone born 6 October 1954 or later. Many of these women say they were given no notice or too little notice of two changes to their state pension age. A strong campaign has been mounted by the group Women Against State Pension Inequality (WASPI). It wants what it calls 'fair transitional protection'.

The House of Commons Work and Pension Committee considered the women's case and in a report published on 15 March 2016 ruled out undoing the state pension age rises or revising the timetable for them because of the cost. (Though it left the door open to those "if the Government is subsequently able to allocate further funding" - p.22 para.5).

Instead it will consider further allowing these women to draw their state pension early but at a reduced rate. The reduced rate would last for life (paras.40-48).

It suggests that the reduction should be at an actuarially fair rate. In other words a woman who chose the reduced pension would get the same in total over he lifetime as if she drew her full pension at the new higher state pension age.

The rate it suggests is a reduction of 5.2% for each year early the pension was drawn. That is the rate used when MPs want to take their parliamentary pension early and is, the Committee says, common among similar work pension schemes. Note that the reduction applies for life so the pension is less from the date it is drawn until it ends on the death of the recipient.

There is already a provision in the new state pension for people to defer drawing it. In that case it is increased for life when they do finally take it. That increase is 5.8% for each year of deferral. The increase is paid as a supplement to the pension rather than as a part of it. That distinction is important because the main pension rises each April with the so-called triple lock of prices, earnings, or 2.5% whichever is the higher. But the extra pension earned by deferring only rises with inflation as measured by the Consumer Prices Index. This April the triple lock gave a rise of 2.9%; the CPI was zero so no rise was paid in the extra pension earned for deferring. The 5.8% increase for deferring is also supposed to be actuarially fair. In other words over the average life the total pension paid would be the same.

Some idea of what the reduction for drawing the pension early would mean is shown in the table. It uses a reduction of 5.5% for each year the pension is drawn early. That is between the 5.2% suggested by the Committee and the 5.8% given for deferring the new state pension.

REDUCED STATE PENSION IF DRAWN BEFORE STATE PENSION AGE
		Full state pension per week
		£120	£125	£130	£135	£140	£145	£150	£155.65
Reduction per year		5.50%	5.50%	5.50%	5.50%	5.50%	5.50%	5.50%	5.50%
Years early	Reduction
0.5	2.75%	£116.70	£121.56	£126.43	£131.29	£136.15	£141.01	£145.88	£151.37
1.0	5.50%	£113.40	£118.13	£122.85	£127.58	£132.30	£137.03	£141.75	£147.09
1.5	8.25%	£110.10	£114.69	£119.28	£123.86	£128.45	£133.04	£137.63	£142.81
2.0	11.00%	£106.80	£111.25	£115.70	£120.15	£124.60	£129.05	£133.50	£138.53
2.5	13.75%	£103.50	£107.81	£112.13	£116.44	£120.75	£125.06	£129.38	£134.25
3.0	16.50%	£100.20	£104.38	£108.55	£112.73	£116.90	£121.08	£125.25	£129.97
3.5	19.25%	£96.90	£100.94	£104.98	£109.01	£113.05	£117.09	£121.13	£125.69
4.0	22.00%	£93.60	£97.50	£101.40	£105.30	£109.20	£113.10	£117.00	£121.41
4.5	24.75%	£90.30	£94.06	£97.83	£101.59	£105.35	£109.11	£112.88	£117.13
5.0	27.50%	£87.00	£90.63	£94.25	£97.88	£101.50	£105.13	£108.75	£112.85
5.5	30.25%	£83.70	£87.19	£90.68	£94.16	£97.65	£101.14	£104.63	£108.57
6.0	33.00%	£80.40	£83.75	£87.10	£90.45	£93.80	£97.15	£100.50	£104.29

The Committee points out that calculating the exact reduction to make the exercise cost neutral is difficult. First, some women - mainly those who were single with few other resources - may be eligible for the means-tested pension credit if their weekly income was below £155.60. Under present rules they would only be eligible for that at women's full state pension age. In the longer term the cost of Pension credit may rise. Second, if women chose to draw their pension rather than work then tax and National Insurance receipts would fall. There would though be some savings if fewer women claimed Jobseeker's Allowance or other benefits. And the scheme would require some administration costs.

The Committee recommends that the Government explores this option and says it will take evidence on it in the near future.

Issues

• Even if the scheme was cost neutral in the long term it would bring cost forward as women claimed their reduced pension earlier. The costs would be felt in the first few years and the savings would only be made over the long term after they reached state pension age but drew their smaller pensions over another 25 years or so.
• Although the Committee says the scheme would apply "from a specified age and for a defined cohort of women" it may be very difficult to impose such restrictions. Equality laws mean that the change could not only apply to women. Even restricting it to those with a certain number of years' delay could be challenged by men as indirect discrimination if women were the clear majority of those affected. So the reduced pension for drawing it before state pension age would almost certainly have to become a part of the new State Pension rules and allow anyone to claim their pension early - perhaps from 60 or even 55 - if they were willing to have a smaller pension for life. That would parallel the existing rule allowing the pension to be deferred in exchange for an enhanced pension for each year of deferral.
• Although the change is a fairly fundamental one, could it be implemented quickly - perhaps by October and certainly by April 2017?
• Women who were already on a means-tested benefit such as Jobseeker's Allowance, Universal Credit, Employment and Support Allowance, Housing Benefit, Council Tax Support would find that benefit was reduced if they got the state pension. So the very women who need the support could find they get the least from it.

Government response

The Government is obliged to give a formal response to a Select Committee report. But the DWP has already said  

“The government has already listened to concerns expressed by those affected by the 2011 changes, and took action to limit the maximum change to state pension age to 18 months, a concession worth over £1bn.

“Women retiring today can still expect to receive the state pension for 26 years on average – four years longer than men.”

Your thoughts

Many WASPI women have already expressed their opposition to this plan in their very active twitter presence. 

Please let me know your response to the Select Committee plans and the issues raised in this blogpost. Email paul@paullewis.co.uk.

I will update this blog to reflect different views and changes.

Background
My earlier blogpost Women Given just Two Years' Notice of State Pension Age Rise

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15 March 2016