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Section 16: Pensioner Households
1. As a general principle, in designing the local property tax, one of our primary aims has been to address ability to pay. Consequently, we consider that no distinction should be made between the needs of low income pensioner households and those of other households on equally low incomes. However, we received many submissions from individuals and organisations representing older people, arguing that special arrangements should be made for pensioners.
2. The GfKNOP research revealed support for the idea that any reform of council tax should give pensioners "a fairer deal" than they presently receive. In their March 2005 report Council Tax: A Path to Poverty?, Help the Aged in Scotland proposed several reforms to the council tax system to assist older people in Scotland. Their focus was that no pensioner household should be required to pay more than 10% of their net income on local taxation; a situation they referred to as being in "council tax poverty", based on a definition of "fuel poverty" developed by the World Health Organisation to describe the circumstances of people who must spend 10% or more of their net income on fuel.
3. Help the Aged reported in a survey they commissioned that the average pensioner household in Scotland paid 11% of their net income on council tax and water and sewerage charges. They also referred to a case study where one 85 year old widow was found to be spending 27% of her net income on council tax and water and sewerage charges over the 10 month period in which she paid these. Their survey also found that the combined cost of council tax and water and sewerage rates usually represented the second biggest item of expenditure for pensioner households, behind food and ahead of such items as rent, heating and leisure.
4. The Help the Aged report and responses we received to our consultation demonstrate how significant a financial burden council tax can place on many low-income pensioner households. The debate about the impact of local taxation on these households has focused upon the following issues:
- The concept of "council tax poverty";
- Low take-up of a means-tested benefit;
- Calls for specific assistance for pensioner households;
- The fact that council tax bills have been rising faster than pensioners' incomes; and
- Particular problems for "asset rich, cash poor" pensioners.
The concept of "council tax poverty"
5. We consider the Help the Aged suggestion that pensioner households should not have to spend more than 10% of their net income on council tax to be somewhat arbitrary.. The central issue is to ensure as far as possible that households are not pushed into poverty as a result of having to meet their council tax obligations.
Low take-up levels of a means-tested benefit
6. This is a point that has been made forcibly to us by Help the Aged in Scotland (and to the Lyons Inquiry in England by Age Concern England). Help the Aged in Scotland reported that a recent survey they commissioned revealed two main barriers to claiming Council Tax Benefit. 238 One was a lack of awareness about the qualifying income level. The other was the complexity of the application process itself.
7. As we discuss in section 15 in relation to Council Tax Benefit, take-up rates among eligible pensioner households are lower than among the rest of the population. We are encouraged that the Pensions Service and other agencies have recently introduced pro-active measures to identify pensioner households that might be eligible to receive Council Tax Benefit, and to assist applicants in completing their applications. While it is too early to know the effects of these initiatives, we hope they can help to bring about the much needed improvement in take-up levels among pensioner households.
Calls for specific assistance for pensioner households
8. We have considered proposals that would give additional assistance to pensioner households, irrespective of their income or broader ability to pay. For instance, Help the Aged in Scotland proposed that single pensioner households should be given a 50% discount on their council tax and water rate bills as a matter of urgency. We also note recent reports that a Labour MSP has proposed that pensioner couples should automatically be given a 25% discount on their council tax bills, 239 and that the Scottish Conservative Party have proposed that pensioners should have their council tax bills halved. 240
9. We consider that these proposals take no account of the ability to pay of pensioner households. The main focus should be on ensuring that households that are eligible for Council Tax Benefit receive it, rather than providing a universal discount that includes households that can afford to pay their due tax liability.
10. Pensioner households can be divided into three categories: those with low incomes and who receive Council Tax Benefit; those who are relatively or absolutely well-off, and those whose income or savings leave them above the benefit threshold but who nonetheless struggle to meet council tax bills.
11. The first category would receive little benefit either from a percentage reduction in their bill or from a flat grant, because their benefit would fall as their tax liability falls. The second category do not need assistance. It is only the third category who would really benefit from a blanket subvention. It is not economically efficient to provide assistance to the whole of a particular segment because a small percentage need assistance.
12. Universal discounts and rebates might be justifiable if pensioner incomes were intrinsically lower than for other adults. However, while median income for pensioner households is lower than for other households, pensioner incomes are in fact spread across the income distribution, as Figure 16.1 shows:
Figure 16.1: The Proportion of Individuals in Pensioner Families in Each Quintile of the Overall Population Net Income Distribution241
Quintile | Proportion of Individuals in Pensioner Families in Each Quintile |
|---|
Before Housing Costs | After Housing Costs |
|---|
Top fifth | 10% | 13% |
|---|
Next fifth | 15% | 18% |
|---|
Middle fifth | 21% | 21% |
|---|
Next fifth | 29% | 31% |
|---|
Bottom fifth | 25% | 17% |
|---|
13. A comparison of Figures 16.2 and 16.3, about the distribution of households by income and council tax band shows that low-income pensioner households ( i.e. those up to income decile 5, other than those in income decile 1 which are most likely to be eligible to receive Council Tax Benefit) are not significantly more likely to live in an expensive home than other households.
Figure 16.2: Distribution of All Households by Net Equivalised Income Decile and Council Tax Band242
Figure 16.3: Distribution of Pensioner Households by Net Equivalised Income Decile and Council Tax Band243
14. As a matter of principle, we see no reason why a working-age household on any given income and living in any given house should be required to pay more local tax than a pensioner household on the same income and living in a comparable house.
15. Then there is the question of cost. Since almost one-third of households in Scotland comprise or include pensioners, 244 any self-funded scheme which assisted all pensioners irrespective of their income and wealth would place a significant additional burden on other households. For instance, a £100 net discount in council tax bills for all pensioner households would require an average increase of around £45 in council tax payable from other households, many of which would have less income and wealth than some of the pensioner households they were supporting.
16. The longer-term impact on the working age population of any measure introduced as a general rebate for pensioners would be even greater, as demographic changes in Scotland result in an increasing proportion of people of older people requiring to be supported by the rest of the population. In 2004, there were 3.3 people in Scotland of working age to every pensioner. Despite the forthcoming increase in the pension age for women to 65, that ratio is forecast to decrease to 3.0 to 1 in 2014 and 2.7 to 1 in 2024. 245
Council tax bills are rising faster than pensioners' incomes
17. Many pensioners who responded to our consultation complained that council tax bills are increasing faster than their incomes. To quote Age Concern Scotland: 246
"The steady increases in council tax have hit older people particularly hard, because most live on fixed incomes. State pensions rise broadly in line with prices, and many private pensions may not rise at all. In contrast, council tax has risen by more than the cost of living."
18. Council tax is a high-profile payment and we recognise that increases in these bills cause considerable and genuine concern to many pensioners. However, the inter-relationship between council tax and pensioners' incomes is more complex than this comparison suggests.
19. Council tax is only one of many items of expenditure that pensioner households, and other households, incur. From one year to the next, the effects of inflation mean that the cost of most of these items will increase.
20. The UK Government produces regular statistics which measure the rate of inflation. One of these measures, the Consumer Price Index (or CPI) is now the Government's preferred basis for measuring inflation for most purposes. Until 2003, the preferred measure had been the Retail Prices Index (or RPI). Both indices measure the difference in prices over a given period of time for a wide range of products and services that a typical household might spend money on. However, the CPI and RPI use slightly different shopping baskets to calculate inflation.
21. One key difference between the two indices is that RPI takes account of council tax bills, while CPI does not. The UK Government is presently committed to increasing the basic state pension by either RPI or 2.5% each year, whichever is higher. As a result, the increase in state pension takes account of the fact that council tax bills have risen faster than many other items of household expenditure.
22. Between 1996 and 2005, RPI increased by 25.7% and CPI by 15.3%. 247 In that time, the average council tax bill per dwelling in Scotland increased by significantly more than both figures: 57.0%. 248 However, this increase was more than reflected by the RPI, which took account of an increase of 87.0% in council taxes across the United Kingdom in this period. At the same time, some other items of expenditure that feature prominently in the basket of spending for a typical low income household increased by substantially less than RPI over this period ( e.g. the cost of food rose by 8.8%) or even fell in price (the index for clothing fell by 20.1%).
23. We are concerned that year-on-year increases in council tax bills should remain reasonable and affordable. Nevertheless, when a household's income is spent on a range of products and services, a comparison of changing incomes and spending must look at all items of expenditure, and not simply any one item in isolation.
24. As a further comparison of changes in the relative status of pensioner and non-pensioner households, we note that HM Treasury states that pensioners are now no more likely to be in relative poverty ( i.e. below 60% of median income) than the population as a whole. 249
Particular problems for "asset rich, income poor" pensioners
25. Some respondents expressed concern about the position of older people who have low incomes but who live in relatively expensive properties. In their submission to the Lyons Inquiry, 250 Age Concern England referred to some older people who many years ago have bought what was then an affordable property, but who now find the value of their property has increased disproportionately to their income.
26. It is important to place the incidence of "asset rich, income poor" pensioners in context. A recent study by the Joseph Rowntree Foundation 251 found that only around 200,000 pensioner households in Great Britain with low or modest incomes live in a Band F to H property, while some 3.9 million pensioner households with low or modest incomes live in a Band A to C property. Looking at pensioner and non-pensioner households together, the study concluded that:
"Contrary to what is often considered to be the case, it can be seen that low income households are heavily concentrated in the lower valuation bands, and low income households in high value properties are exceptional." 252
27. There is an economic argument that a local property tax such as we propose can be used to encourage optimum use of housing stock. We consider the arguments for and against this in section9.
28. In relation to more vulnerable elderly people in particular, we recognise the argument made by Help the Aged (see section9) that there are important links between an older person's home and their sense of well-being and their sense of identity. If they have the ability to choose their home based on their own priorities, this not only promotes their quality of life, it also has the potential to reduce the financial burden on the rest of society for social care costs associated with looking after an elderly person who may have lost informal support networks after moving to an unfamiliar new home. We have given thought to methods by which asset-rich, income poor pensioner households can meet the obligations of the new council tax.
29. Recent survey evidence 253 indicates that for many people the family home is not simply viewed as an asset which should be passed from one generation to the next. Two-thirds of those with the ability to leave a bequest say they will not worry too much about not passing on an asset, while more than half of the population say they are "not at all" or "not very" likely to inherit any property.
30. The results suggest that older people appear to be willing to use some of their lifetime assets rationally for themselves, to meet needs as they arise. A house is increasingly seen as a valuable investment for people to use in their own retirement, with older people frequently releasing equity from the value of their home during their own lifetime. Age Concern recently reported a rapid increase in interest in equity release among older people, 254 while Saga and Help the Aged both offer equity release products for older people. The scenario of an asset-rich, income-poor household described by Age Concern (see above) is one where a substantial proportion of the increase in value of the home - and therefore borrowing capacity - has risen through high levels of market demand. However, equity release schemes have a number of disadvantages, including the facts that they release a lump sum, which usually is larger than is required and they are expensive to set up. As these organisations acknowledge, neither equity release nor other kinds of borrowing are appropriate in all circumstances, and we recognise that particular care must be taken to protect vulnerable older people.
31. Pensioners who are asset rich but income poor may be eligible to receive Council Tax Benefit, which does not take account of the value of the family home. As stated above, Council Tax Benefit rules permit households to have up to £16,000 in savings, which covers 85-90% of households with modest incomes, and no capital limit applies at all to recipients of Pension Credit (Guaranteed Credit) ( PC( GC)). 255
32. For the relatively few low-income households with more than £16,000 in savings and who are not eligible to receive PC( GC), it may be reasonable to expect some of those savings to be used to supplement income.
Deferment of LPT liability
33. A particular problem arises for those relatively few pensioner households whose gross income is above the limit for any Council Tax Benefit support but who historically have lived in a relatively expensive house. The problem is caused by the impact of rising property tax on a relatively static income. So it is entirely feasible that some pensioner households might be facing a local property tax charge equal to 25-30% of their gross income, while still in receipt of an income above the limit of eligibility for any support. Removal of the single person's discount would worsen the situation.
34. We have considered whether it might be appropriate to introduce a tax deferment scheme for older people. Such schemes exist in other countries. We have discussed the suggestion briefly with COSLA and CIPFA Directors of Finance Section. Neither supports the idea. Nonetheless we are predisposed to favour any additional option that might help people to pay their local property tax.
35. There are several ways in which a deferment scheme could be implemented. On possible way is outlined in the following paragraphs. There may be one or more better options.
36. Under this proposal, local authorities would administer an optional local property tax deferral scheme for pensioner households who own their own homes.
37. There are a number of parameters which must be met, including:
- Any scheme must be simple and inexpensive for households to be able to apply for and for local authorities to administer;
- Local authorities' cash flow must not be adversely impacted - i.e. local authorities cannot be expected to finance the cash shortfall from financing deferments; and
- Local authorities cannot themselves borrow to fund the shortfall because of the potential impact on the Public Sector Borrowing Requirement. Consequently local authorities would act only as agents for the funders of the scheme and would have no liability under the scheme for any repayment of amounts deferred.
38. The scheme would be open to any homeowner without a mortgage or with sufficient residual equity. Whether eligibility should be limited to those over, say, the age of 65 is a political decision. The selected age limit must be high enough to ensure that the owner's (residual) equity in the house is sufficient to cover their actuarial life expectancy. In these circumstances, and given that the annual deferment would be less than 1% plus rolled-up interest, life expectancy should not be such for the debt and accumulated interest to exceed the residual value in the house, which value will increase over time. If this is considered a concern, then insurance cover should be obtainable with a one-off payment.
39. When qualifying householders receive the local property tax bill from their local authority, they would have the option each year of deferring payment. Whether they should be able to defer all or all except, say, £500 of the bill is for debate. Should they be required to make some contribution to the local authority's costs or not? Low income households in receipt of 100% Council Tax Benefit make no contribution to such costs and logically there is no reason why those deferring should not defer the whole amount.
40. The householder would inform the local authority of their intention to defer and send in documentary proof of their age(s). The local authority would then approve their application. The deferment would be funded through a new, special purpose company ( SPC) with no other assets or liabilities, set up for any or all local authorities which are participating. Each annual deferment would be a separate amount in a SPC account in the name of the householder. So for example, after 5 years of deferments, the householder would have an account with SPC with five separate drawings and five varying amounts of compound interest. Interest would be charged by SPC but would be rolled up and added to the amount borrowed. So the householder would have no annual interest to pay.
41. The local authority would take a charge on the property concerned either in its own name or in the name of the SPC. If taken in the local authority's own name, the benefit of the charge would be assigned to the SPC. The cost of taking the charge would be added to the householder's deferment account with the SPC. As agent, the local authority would be responsible for ensuring that the householder(s) qualify, for taking the charge and for assigning the benefit of the charge to the SPC. For subsequent years, the householder would again seek a deferment and, because the structure already was in place, no additional work would be required, other than to inform the SPC of the amount involved.
42. Each annual deferment would constitute a separate loan. The SPC would have no employees and would be administered either by the local authority or by a private sector company. Its costs would be included in the interest charged to the householder's deferment account, which will be funded by further drawings on the funding lines.
43. The SPC would advance to the local authorities the amount deferred. It would fund itself from the market and would have no liabilities other than the funds it borrowed. It would be possible to borrow at a fixed rate for the expected period of each loan. There is a valuable precedent in the structure and methodology of the United States residential mortgage market where fixed rate loans are advanced for indeterminate periods.
44. When the house was sold, the local authority would release the charge on receipt of the amount in the householder's deferment account with the SPC and pass the funds to the SPC.
45. Although it sounds complex, the concept is one familiar to the financial markets and it would be easy to introduce. The local authorities would be responsible for confirming the value of the property (already done by definition for the purpose of setting the tax), for obtaining the first charge and for claiming the amount deferred by the householder(s). They also would be responsible for passing on the funds to the SPC on sale of the property. The SPC would be responsible for paying over the deferred amounts to the local authority, for maintaining the loan account records, for communicating with the householder and for funding itself from the financial market.
46. It is also worth considering whether such an optional scheme should be introduced as soon as possible, to enable eligible households to defer current council tax payments.
Recommendation 9: There is no valid justification for introducing any discount scheme covering all pensioner households irrespective of their income and we recommend that no such scheme be introduced.
Recommendation 10: Nonetheless, to address problems that face pensioner households that are relatively asset-rich and income-poor, we recommend that consideration should be given to the introduction of an optional deferment scheme for pensioner households who own their own homes.
Recommendation 11: We recommend that consideration be given to introducing an optional deferment scheme as soon as possible to enable eligible households to defer current council tax payments.
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