[holding answer 22 January 2009]: In pension credit the first £6,000 of capital is fully disregarded (£10,000 for those in care homes). For each £500 (or part of £500) above this level we assume notional income at a rate of £1. There is no upper capital limit in pension credit.
Receipt of the guarantee credit passports recipients onto full housing benefit and council tax benefit.
In housing benefit and council tax benefit there is a capital limit of £16,000, which means that people with capital above this level will not normally qualify for benefit. Capital of £6,000 or less is ignored (£10,000 for those in care homes). For those customers who have reached the age to qualify for pension credit notional income is assumed on capital between £6,000 and £16,000 at a rate of £1 per week for each £500 or part of £500.
The tariff income formula is not intended to represent any rate of return that could be obtained from investing capital. It provides a simple method of calculating the weekly contribution that people with capital in excess of £6,000 (£10,000 for those in care homes) are expected to make from their resources to help meet their normal living costs.
As there is no link with actual market rates, tariff income rules are not adjusted when interest rates change. If you were to calculate an implicit rate for pensioners, based on capital of £6,500 it would be 0.8 per cent.
In answer to part (a) of the question, abolishing the current capital disregard and assuming notional income at a rate of £1 for each £1,000 of capital or part of £1,000 for pension credit, housing benefit and council tax benefit would save the Exchequer approximately £70 million per year (2008-09 prices). However, pensioners with savings of less than £6,000 would be worse off. Removing the current disregards would mean that all those pensioners with modest savings, who currently have no income assumed from capital, would see their benefit reduced. Retaining the current disregards and calculating national income based on bands of £1,000 above the level of the disregard would cost the Exchequer approximately £170 million per year (2008-09).
In answer to part (b) abolishing the tariff income rules, but retaining the upper capital limits in housing benefit and council tax benefit, would cost approximately £550 million per year (2008-09 prices).
These estimates have been calculated using the Policy Simulation Model (PSM) which uses data from the Family Resources Survey (FRS). Estimates are subject to sampling and modelling uncertainty.