Thursday 10 June 2010

The Poor Widow Bogey

There hasn't been much government sponsored or fakecharity advertising on the telly for the past couple of months, but I did notice one by fakecharity Age UK (featuring some famous actor - you can watch it on YouTube) pointing out that loads of pensioners are 'trapped' in their homes and are feeling a tad lonely (make your donation here).

Fair do's. Age UK's website also tells us that "Two million of us in later life are not able to cover our basic food and fuel bills, let alone do all the things in retirement that we had looked forward to, because we don’t have enough money."

As well as informing us that "The total property wealth of retired homeowners has jumped by almost £2 billion in the last three months after house prices continued to edge ahead... people aged 65 and over in Great Britain had collective equity of £767 billion at the end of last month... Retired homeowners in the North East were the biggest winners as their equity levels grew by 4.6%, or about £5,000 per household..."

Hey... let's try and join the dots here - pensioners are simultaneously poor-and-wealthy. So let's imagine a Poor Widow with an average woman's state pension of £70 a week, rattling around the slightly above average 'family home' worth £200,000 in Band E for Council Tax (£1,550 per annum). She has no other income or savings and has espied a nice two bed ground floor flat round the corner, which would cost her £120,000 (and which is in Band C for Council Tax, £1,127 per annum).

She's come up with a plan to trade down and boost her meagre income with the interest on the £80,000 cash she can free up (she is adamant that she will only spend the interest and not the capital) and asks you to advise her. Should she:

a) Stay where she is, or

b) Trade down and boost her income with the interest on the cash she can free up?

You can probably guess the answer - it's (a) of course. I've checked my own calculations at Directgov's Benefit Adviser and if she does (a) she ends up with a net weekly income, after Council Tax, of about £130, but if she does (b) she ends up with about £85 after Council Tax (and that's after reducing it by the 25% discount for single occupants).*

So in future, before people yap on about Land Value Tax 'forcing the asset-rich, income-poor out of their homes', could we maybe address the fact that under the existing system, the taxpayer is being forced to 'force' such people to stay where they are?

Unless I've missed something, the taxpayer is being fleeced in order to reward such people to make decisions that defy commercial logic and are not in their best interests either. Or is it possible that the whole object of the exercise is to ensure a scarcity of family-sized houses and hence ever higher house prices?

* The calculations are tricky, but broadly speaking, if she stays where she is, she gets £70 state pension + £60 Pensions Credit, and full Council Tax Benefit. If she frees up some cash, she disqualifies herself for Pensions Credit and Council Tax Benefit, and at present she'd be lucky to earn 2% interest on that cash - interest rates having been depressed as far as possible to try and keep the house price bubble going.


TheFatBigot said...

I know you would be feeling almost suicidally disappointed if I didn't have a yap. So here goes.

I'm not being picky here, but she wouldn't have £80,000 to invest. Estate agent's fees of, say 2% plus VAT would be £4,700. She has to pay for the conveyancing on both sale and purchase, say £1,500 including disbursements and VAT if she's lucky. Removal companies use lots of chaps with tattoos who need to be paid, call that another £1,300 to keep the figures round. Even without Stamp Duty she's got at most £73,000 left. That doesn't produce much income these days, £28 a week at 2%.

Trading down to release capital only makes sense as a retirement plan if either (i) you free so much capital that the investment income places you well above the benefit levels or (ii) you increase your income by using capital as well as interest (and the children can whistle for their inheritance - they should have been nicer to mummy).

Someone of 70 who follows that path could plan to utilise the capital and interest over 15 years and be significantly better off despite losing benefit entitlements. By "significantly" I don't mean a lot of money but it would be significant for someone who previously had only £70 a week in her purse.

So, my advice would be to stay put if she wants her children to benefit but move and spend everything if she wants to enjoy her money herself. If it comes to that, I'd also suggest she flogs her new place to one of those "equity release" companies that will give her even more spending cash and leave nothing for her children. As I say, they should have been nicer to mummy.

Lola said...

In re equity release, they often fail on the benefit test since mny ER schemes simply cause benefits to be withdrawn. So not only does not trading down help, neither does an ER scheme.

There's defintely something wrong here!

Mark Wadsworth said...

TFB: "someone who previously had only £70 a week in her purse."


1. She was always entitled to the extra £90 Pensions Credit + Council Tax Benefit. Did I say she wasn't claiming it already?

2. And of course she could improve her return on the £80,000 (your total £7,000 moving cost is exaggerated - and on a £120,000 flat there's no SDLT) by buying an annuity, but that is not comparing like-with-like.

3. And even if she bought an annuity paying 5%, she'd just about break even.

L, ER schemes are largely a huge con (as you point out) and that's still not comparing like-with-like anyway.

bayard said...

The means-testing of benefits is purely the Politics of Envy (is this a British thing or is it worldwide?). Much better, IMHO, to make it so that getting them involves a modicum of time and effort, so that the majority of those who don't need them won't bother.

Slightly OT, but one problem with LVT I can see is that there would be a tendency to set the rate at the maximum the electorate will bear, as all taxes are set, which will lead to a situation where an increase in land value will be reversed by the effect of the corresponding increase in LVT, leading to a decrease in land value etc etc.

Steven_L said...

How regulated is this equity release stuff?

I'm going to need a new job soon and selling that sounds like a corker.

Failing that selling physical gold and silver ingots isn't FSA regulated. So the poor widows that do want to hand down some inheritence are ripe for the picking there!

Mark Wadsworth said...

B, as to benefits, my view is universal or not at all. The balancing figure is the tax rate.

As to LVT, the purists say it should be on site rental values, which are more or less fixed. There is no Laffer Curve. Worst case, the tax either
a) acts like VAT or income tax on bricks and mortar., or
b) does not collect full site rents.
Neither of these is anything much to worry about.

And if the tax were on capital values, then as you point out, there is no Laffer Curve either - an increase in percentage terms is more or less self-cancelling in revenue terms, but revenues do not start going down again.

Mark Wadsworth said...

S_L, as to regulation of equity release schemes, they are busily raising barriers to entry as we speak, but you'll have to ask Lola, he's Financial Services Minister.