Savings crash sees pensioners suffering

Published on Friday 15 May 2009 20:03

THE financial outlook for Scotland's pensioners is deteriorating as rock-bottom savings rates force more below the poverty line.

Since the Bank of England began cutting base rates last year, pensioners have seen the income they earn on savings dwindle to virtually nothing. The impact has been profound, according to Age Concern Scotland, which called for action to alleviate the situation.

The Scottish Government last week revealed that the number of pensioners living in poverty increased by 20,000 in the 2007-8 tax year, before savings rates collapsed.

This was partly due to the level of inflation faced by pensioners, which remains higher than average even after recent inflation falls.

The most recent Alliance Trust research showed that over-75s face an inflation rate of 4.6 per cent, 77 per cent higher than that for people aged 30-49, as older age groups spend a higher proportion of their income on costs such as energy, which have soared in the past two years. Few pensioners are among the borrowers who have benefited from lower repayment rates.

More recently, the problem has been exacerbated by the loss of the savings income on which millions of pensioners depend.

Data published by the Bank of England this week showed that the average interest rate paid on instant access accounts, which older savers tend to favour, plunged to 0.15 per cent in April, from a figure of 5.19 per cent a year ago.

Consequently, millions of older people with savings of about 10,000 have lost between 10 and 20 week in savings income.

For pensioners who have accumulated modest savings over their working lives, rock-bottom rates have proved a body blow, said Roydon Keenan of South Queensferry, president of the senior citizens' forum for Edinburgh West.

"OIder people on low salaries have always been able to save a few bob, but anyone with savings has been hit considerably," Keenan said.

"Elderly people have learned that whenever there is a change in financial circumstances, it always impacts them disproportionately"

The implications of the collapse in savings rates are all too clear, said John Adams, professor of economics at Edinburgh Napier University and economic policy adviser to Age Concern. "Savings are giving people no income, so they are eating into the capital they need, which makes the future even bleaker. There is no available savings product for these people unless they are prepared to take more risk, which most are not."

One problem is that too few pensioners use tax-free cash individual savings accounts (Isas), according to David Legge, senior consultant at Henderson Loggie in Edinburgh.

"A lot of retired people are very cautious and keep their money in building society accounts that give them paltry interest," he said.

"They are reluctant to make changes but they are disadvantaged as a direct consequence."

However there are signs that more pensioners are saving into cash Isas, said Keenan, partly because the qualifying rules for Isas mean they are more like old fashioned bank accounts, with no restrictions on withdrawals.

But the bleak financial predicament facing millions of pensioners all boils down to the basic state pension, said Keenan, who noted that when savings rates provided sufficient income to get by, the paucity of the basic state pension could just about be tolerated.

Campaigners have long called for a rise in the state pension, but little has come.

In last month's Budget, the Chancellor guaranteed that the basic state pension, currently 95.25 a week, would rise by at least 2.5 per cent next year, equivalent to 2.40 a week. The result, said Age Concern Scotland chief executive David Manion, is that pensioners are going without essentials, such as heating and decent food.

The assistance provided through benefits such as pension credit is undermined by a complex system, which means many pensioners do not know how to claim what they are entitled to. Age Concern and Help the Aged (which merged last month), believe up to 2.8 billion a year in pension credit goes unclaimed, because of a combination of low awareness and antipathy towards the means-testing process.

The pension credit is designed to ensure that no pensioner lives on less than 130 a week (198.45 for couples).

The threshold was increased from 6,000 to 10,000 in the Budget, meaning interest earned on up to 10,000 of savings is not included in assessment for pension credits. This will give around half a million pensioners with savings below 10,000 an extra 4 a week – assuming they are aware of it – but it does not take effect until October.

With a sizeable basic state pension rise unlikely, pensioners can only hope for a series of smaller measures to help them out, said Adams at Napier. "We could have another reduction in council tax, increased winter fuel payments and different things that can go some way to replacing the lost income.

"It will not cost as much as a basic state pension increase and will be more realistic politically."