For those about to retire – and future generations of pensioners – the impact will be felt for many years.
Treasury figures suggest that, as of next April, 4.41 million existing pensioners will be worse off in real terms due to the freezing of age-related allowances, with an average loss of £83. But workers who turn 65 next year will be the biggest losers from the move, with an average loss of £285 for the year.
However, the Treasury was quick to point out yesterday that, because of other changes to pensions and benefits, the over-65s would see their losses reduced. The Institute for Fiscal Studies agreed, calculating that, by 2014, pensioners will lose on average about 0.25 per cent of their income in 2014 or about £60 a year.
About 3.2 million over-65s do not claim age-related allowances, so many are losing something they never had in the first place.
Under the proposals everyone born after April 6, 1948, will never receive age allowances. Instead, they will retain the standard personal allowance, which will have risen in line with inflation to £9,205. Those already receiving age-related allowances — worth £10,500 for people aged between 65 and 74 or £10,660 for those 75 or older by April, 2013 — will receive no further increases in the age-related component.
This is forecast to increase HMRC receipts by £360 million in the tax year 2013-14, rising to £1.25 billion by 2016-17, according to Treasury documents. That’s £3.3 billion extra tax over four years.
This will be offset by what the Treasury calls a “triple lock” of measures to improve the average pension allied to the eventual move to a £140 a week universal retirement payout. Everyone entitled to the basic state pension will benefit from the way it is uprated next month in line with the level of inflation last September.
Mike Warburton, an accountant at Grant Thornton, said: “This April the basic state pension increases to £107.45 per week and is now set by a 'triple lock’ so that it rises by the higher of consumer prices index (CPI) inflation, average wages or 2.5 per cent.
“The increase next year at 5.2 per cent, compared to CPI of 3.4 per cent now, reflects the high inflation at September 2011. By setting a target of £140 before the start of the next parliament, it means pensioners will have enjoyed an increase in their basic state pension of some 43pc since this Government was formed.”
That’s a bigger increase in income than many working people will manage. So while tax simplification is urgent, the outlook is not all bad for pensioners.