Penalising Savings

chris1

dunstonh wrote: »

Endowments are not included in any means test. In the past that used to be a real benefit to those that lost their jobs. Of course, there isnt many of those left now but it would be an irony if it turned out that having an endowment mortgage would have been better for a lot of people.

Mortgage? Surely "£1 million in an investment bond" isn't the same as an endowment mortgage?

In theory, you could have £1million in an investment bond and get paid tax credit. Pretty extreme example but technically possible.

Milarky

chris1 wrote: »

Mortgage? Surely "£1 million in an investment bond" isn't the same as an endowment mortgage?

I believe the argument for exempting the endowment (if that is what dunstonh is equating an 'investment bond') from capital rules under income support (and hence pension credit) is they are 'life insurance' policies in addition to containing capital (as they have a maturity value) so 'surrendering' the life insurance meant forgoing a benefit beyond simply the capital spent. This is a baloney argument of course, because the life insure element is small anyway - so a separate value could be put on that (say) and simply subtracting from the current surrender value. For example a policy based on a premium of £40 a month might be valued at £10000. Let the DSS (or the DWP as they now call themselves) take 10% off that for the life insurance element and that leaves £9K. Now its up to them what they do about it: For instance they could impute the 'return' on £9k of imputed capital at 10% (like they do for regular savings) That give our pensioner £900 a year. At 40% that would be £360. But the cost of the life insurance element could be deducted from this dededuction - i.e. added back. At 10% of the policy premium that's £4 a month (effectively the pensioner is 'saving' the other £36 - it has future value regardless) So that would be a deduction of £312 a year - exactly £6 per week for an 'endowment' valued at £10K... That they don't this can only be explained by some historical anomaly in the drafting of the rules. It's a shame they couldn't take a more consistent and intellectually honest approach to assets - but they don't - and then people come on here and say things like: "The benefits system isn't meant to support people with savings"

john_s_2

Milarky wrote: »

... the imputed return from capital over £6000 is 10% (a deliberately unrealistic imputation even back then)...

The 'tariff income' rules (as they're called in social security legislation) aren't intended to reflect the amount of income that an amount of capital will generate. It is intended to be a reasonable amount that someone should use from their savings before expecting the state (taxpayer) to pay for them.

I used to work in a DSS office in East London. Most of our claimants would have thought someone with £1000 to be rich, let alone £6000. Let alone £16,000.

If you have £6499 then your pension credit will be reduced by £1 a week. It would take 500 weeks (nearly 10 years) before this reduced to below £6000. And then you wouldn't have any reduction at all. (This assumes no interest on the savings and no changes to the benefits rules.)
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I have no sympathy for people who could have put something by for a decent private pension, but didn't. (Let alone those who dodged their NI contributions so don't qualify for the State Pension.) I have a lot of sympathy for those for whom it was not worthwhile putting by what little they had spare towards a pension, but nonetheless have built up a fair few thousand of savings. As described above, these savings will be gradually eroded - but (as shown above) this will take a decade at least.

It can be argued that if you know you're going to have to rely on means tested benefits in retirement then there is little point building up savings. This is the way it's been for decades. I daresay the rules were even more stringent before that (it used to be the case that the National Assistance Officer would tell you to sell any spare pans you had before you'd get any benefit. So you would deliberately chip your pans to make them worthless, thus exempt from this rule.)

Personally I think that for someone in this position that it is still worthwhile saving money if you can. Otherwise you'll be at the mercy of the social fund system for when you need a new cooker / fridge, etc.

fanheater

fortune87 wrote: »

could you please tell me the different ways in which the uk government penalise savings? I know they do on pension credit to an extent but was just wondering if there were any other ways?

thanks

to be clear, the problem with taxing savings is that the money ends up being taxed twice -- when you earn it to start with, and then when you receive interest on it.

low interest rates penalise saving obviously, and there's a fair amount of government influence on interest rates.

i guess you could say the government is pursuing a highly inflationary policy, which results in devaluing the currency, which penalises the holders of the currency which are savers, and benefits those who owe currency, i.e. borrowers.

i'm sure there are other ways in which savers are penalised.

dunstonh

The life assurance exemption goes back to the endowment days to prevent means tests from including and possibly forcing endomwents to be surrendered. However, it had the knock on effect of including single premium endowments and single premium, whole of life assurance plans (investment bonds), even where the life assurance is just 0.1%.

I wasnt actually linking the two things in my two different posts. However, whether it is £1million in an investment bond or £20,000 in an endowment, neither are allowed to be included in means tests.

uih039

fanheater wrote: »

to be clear, the problem with taxing savings is that the money ends up being taxed twice -- when you earn it to start with, and then when you receive interest on it.

This is a common complaint which I fundamentally disagree with.

The money which has already been taxed is not being taxed again; only the interest on this money is being taxed, i.e. the NEW income.

If you save £1,000 and get £50 of interest, you would have a valid argument if the tax was £210, i.e 20% of £1,050. However, the tax is actually £10, i.e. 20% of £50.

Andrew.

fanheater

andrew,

I take your point, and you could also point out that when it's spent it's taxed again as well, through VAT or excise duty or whatever.

but the interest only exists in so far as it's part of the principal. you can't have the former without the latter. bearing in mind that interst rates generally follow inflation, I would say the your point is a semantic one.

chris1

dunstonh wrote: »

However, whether it is £1million in an investment bond or £20,000 in an endowment, neither are allowed to be included in means tests.

Are share dividends included as income for Pension Credit? (I know that the capital value of the shares is.)

If it is, how would they calculate it?