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Lord Higgins: I can think of very little that is more complicated. Perhaps we should have a quick show of hands.
That is at least a bit of progress. I shall have to consider what the noble Baroness has said. Does it apply to both Clause 6 and Clause 5?
Baroness Hollis of Heigham: We are dealing with Clauses 2 and 3. It might be helpful if we could stay with the current clauses.
Lord Higgins: The amendments cover two separate clauses. Does the noble Baroness's explanation apply to each of them?
Baroness Hollis of Heigham: The amendments cover Clauses 2 and 3. What I have said applies to both.
Lord Higgins: I shall study carefully what the Minister has said, as, I imagine, will other people. On that basis, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 20 and 21 not moved.]
Lord Higgins moved Amendment No. 22:
- After Clause 2, insert the following new clause—
The noble Lord said: The amendment is concerned with the 40 per cent withdrawal rate, which is a matter of great importance. Our understanding is that the Government do not intend that the effective withdrawal rate shall be greater than 40 per cent. It seemed appropriate to put that on the face of the Bill. That is better than the 100 per cent withdrawal rate that people in the relevant income bands suffer at present, but they will still not get the full benefit of their savings.
That relates back to our earlier debate on the name of the Bill and whether the provision is a pension credit or merely a relief from taxation. People at that relatively low level of income will pay at the equivalent rate to which someone on an income of nearly £34,000 would be subject. There is a strong case for ensuring that that is put on the face of the Bill.
There is also considerable interaction with housing benefit and council tax benefit. The noble Baroness will remember that I raised the point on Second Reading, when she was kind enough to assure me that the Government would take steps to deal with it. The withdrawal rate that would apply if they took no action could be 85 per cent or more for those benefits. That is a very serious matter. However, it is not clear precisely how the Government propose to make arrangements that will ensure that those receiving housing benefit and council tax benefit do not suffer such high withdrawal rates.
It would be particularly helpful if the noble Baroness could give us some idea of the impact of the proposals on those drawing housing benefit and council tax benefit. In particular, am I right in thinking that the Government are dropping any idea of reforming the situation with regard to housing benefit? We have had frequent discussions on that subject. Will central government or local authorities be responsible for ensuring that people with those benefits do not suffer a higher withdrawal rate? I beg to move.
Baroness Hollis of Heigham: As the noble Lord, Lord Higgins, raised two perhaps unrelated points, I am not sure how best to reply. His first point was that no one drawing the state pension credit should suffer a benefit withdrawal rate greater than 40 per cent. In his comments, he seemed to be asking for a commitment that the taper on pension credit itself would not be greater than 40 per cent. Leaving aside issues such as the 60 to 64 age group, as the Government intend to do, he also drew some analogies with the tax system. I should be happy to debate those analogies with him if time allows. However, it is certainly our intention that that should be the taper on the pension credit itself.
The interaction which the noble Lord rightly identified between the pension credit, housing benefit and council tax benefit withdrawal tapers is an extremely complicated issue. Perhaps it would assist him if I tried to spell out that interaction. If he wishes, I could follow up the points later, undoubtedly turning something simple into something complex.
Amendment No. 22 would have the effect of ensuring that no pension credit recipient suffered a marginal deduction rate of more than 40 per cent. Although that is fine as far as the pension credit is concerned, if the 40 per cent were to apply to all the benefits that pensioners enjoy—as the noble Lord, in his second point, seemed to suggest it should, although he was talking about 80 per cent—the total cost would be about £17.5 billion. As I am sure that that is not what the noble Lord intended, I shall make a disjuncture between the two parts of his remarks—first, that the pension credit was due to be tapered off at 40 per cent; and, secondly, the effect on MDRs given the interaction between the taper with other tapered, means-tested benefits.
Currently, pensioners with incomes below the minimum income guarantee level—which, in 2003, will be £100 as the guarantee element of the savings credit—suffer a marginal deduction rate of 100 per cent. For every pound of extra income, they lose one pound of minimum income guarantee, to take them up to the threshold level at which we think we can reasonably expect them to live. Consequently, everything they have put into their savings effort is wasted.
Above the minimum income guarantee level, currently, those who receive both housing benefit and council tax benefit experience a marginal deduction rate of 85 per cent: 65p in the pound for housing benefit and 20p for council tax benefit. To reduce that rate to 40 per cent—which is the figure we thought the noble Lord, Lord Higgins, might be indicating in the amendment—we would have to pay housing benefit and council tax benefit to people even further up the income scale, at a much greater cost to the taxpayer. The change would affect 2 million people.
The pension credit improves the situation considerably. The 100 per cent withdrawal rate will be experienced by only one third of those eligible for the guarantee credit. The other two thirds—in fact, all recipients over 65—will have incomes between the savings credit threshold and the guarantee credit. They will therefore be on the savings credit and, as the noble Lord said, face withdrawal rates of 40 per cent, which is an improvement on the current situation. Currently, if they had an income of between £77 and £100, they would be facing a 100 per cent rate. They are therefore going from 100 per cent to 40 per cent. Those on the 40 per cent withdrawal rate could therefore gain up to £13.80 per week if single and £18.60 if a couple. We have also been careful to protect the gains for pensioners who receive help through the housing benefit and council tax benefit systems. As the noble Lord acknowledged, we have also increased the allowable amounts.
However, single pensioners who are on pension credit, receive housing benefit and council tax benefit and are in the £100-£135 income range will be subject to the interplay of the withdrawal of pension credit and the tapering of housing benefit and council tax benefit. As I said in my letter to the noble Lord, the net effect is a marginal deduction rate of 91 per cent. However—and this is the key issue—68 per cent of pensioners are owner occupiers. On my calculations, only 8 per cent of pensioners on the pension credit will experience that taper. Most pensioners are not on housing benefit, although some who are owner occupiers are on council tax benefit. As I said, however, 68 per cent of pensioners are owner occupiers, and others live with their family. Although others have income higher than the pension credit, they are still entitled to housing benefit because they have higher rents.
Therefore, the first group of pensioners, with 100 per cent deduction between RP and income guarantee, will have a deduction of only 40 per cent and be better off. Single pensioners with an income between £100 and £135 will have a 91 per cent rate if they receive housing benefit and council tax benefit. However, only about 8 per cent of the total pensioner population fall into that group. Thereafter, people will be subject only to the housing benefit and council tax benefit tapers, bringing them back down again to the 85 per cent rate as they lose the pension credit.
The key point is that, although there are higher marginal deduction rates, they apply to much higher housing benefit so that there are no cash losers. I believe that everyone is better off as a result of our proposals. Although some will suffer a 91 per cent deduction rate, they will be £7 to £8 or so better off than they would have been under the old system with an 85 per cent deduction rate but without the pension credit.
I hope that my remarks are helping the noble Lord, Lord Higgins. Our changes in the MDRs are better for those with incomes under £100. Although the percentage rates are worse for those on between £100 and £135 if they are receiving housing benefit and council tax benefit, as I said, that affects only 8 per cent of the pensioner population. The situation remains the same for those on more than £135. If single pensioners in that group exhaust the pension credit, they move back on to the old housing benefit and council tax benefit tapers.
Those on between £100 and £135 comprise the pressured group. Nevertheless, although they are subject to higher MDRs because of the new benefit being considered in the tapers, their absolute cash income will still be higher. In other words, they will be much better off—at least £11 per week—as a result of our proposals.
Amendment No. 22 would certainly cost about nine times as much as our pension credit proposals, unless we scaled back the minimum income guarantee dramatically. I am sure that the noble Lord was not intending that, but seeking to probe the effect of the MDRs. Although the MDRs seem to become worse for the small hinge group comprising those on £100 to
It is helpful to try to have a go at a technically complex subject—the interplay of tapers in two or three different benefits. In the light of my comments, however, I hope that the noble Lord will withdraw his amendment. If he would like to write to me to follow up the points or seek clarification, I shall do my best to be helpful. It is a very technical set of issues.
"WITHDRAWAL RATE
No one drawing a state pension credit shall suffer a withdrawal rate of benefit greater than 40 per cent."
6.30 p.m.
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