Low earners who save privately into a pension could have their benefits effectively taxed by up to 6...
Low earners who save privately into a pension could have their benefits effectively taxed by up to 60%, under the Government's proposed pension tax credit, writes Kira Nickerson.
As of April 2003 the Government will offer to top up the minimum income guarantee (MIG) from £77 to £100 a week. To incentivise people to save and not rely solely on the State, the Government is introducing a pension credit. For example, in the case of an individual who saves up enough in a pension fund to provide £10 of income a week, the Government would supply them with £77 straight off, and only has to provide an additional £13 to meet MIG requirement.
The pension credit, which works out at 60p per £1 in private pension income, would give the individual an additional £6, taking the total weekly income to £106, as opposed to £100 if the person had not saved.
Therefore, for £10 in savings the individual only receives £6, which the life industry regards as a 40% reduction in savings.
Mike Griffiths, senior technical adviser at NPI, said: "In practice, assuming current tax rates, the reduction in benefit can be nil up to 62% depending on the financial circumstances of the pensioner in the year of payment. The worst affected are couples of whom only one has an NI contribution record. They can suffer the 40% reduction as described above, and if they have a little private income the earner could easily suffer an additional 10% or 22% income tax on the privately funded pension."
Both State second pensions and private pensions are subject to income tax, however MIG benefits are not taxable. NPI has suggested that some of these problems could be surmounted if the Government were to utilise a form of taper credit. Griffiths said: "The cleanest solution we feel would be for the Government to exempt a certain amount of pension income, say up to £50 per week, including private and state earnings related pensions from the means test.
"Alternatively they could give a one for one credit on such income up to a particular level, say £30 a week, a 0.8 for one credit on the next £20 and the credit could run off at 0.6 for one on top of that."
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