Section 3: Savings credit

70.     Section 3 specifies the conditions that must be satisfied (in addition to the two "common conditions" described in connection with section 1) if the claimant is to be entitled to savings credit (subsections (1) and (2)). It then goes on to explain the calculation for determining the amount of savings credit to which a claimant is entitled (subsections (3) and (4)).

71.     The condition of entitlement in subsection (1) is that the claimant has attained the age of 65 or is a member of a couple the other member of which has attained the age of 65.

72.     The condition in subsection (2) has two parts, each concerned with aspects of the claimant's income.

73.     The first part (paragraph (a)) requires that the claimant has what is referred to as "qualifying income" of an amount that exceeds a figure referred to as "the savings credit threshold".

74.     "Qualifying income" is addressed by subsection (6), which confers power to make provision by regulations as to income which will or will not be "qualifying income". The intention is that the claimant's "qualifying income" will, broadly, be those parts of the claimant's income which arise from:

• contributing to the National Insurance system (for example, a Category A or Category B retirement pension, including additional pension);

• the claimant's own retirement provision (for example, an occupational or personal pension, or income from capital);

• earnings.

75.     The "savings credit threshold" is a prescribed amount (see the definition in subsection (7)). The amount prescribed is expected to be around £77 in 2003 for a single person and £123 in the case of a couple.

76.     Savings credit is, however, to be subject to a maximum entitlement, referred to as "the maximum savings credit" (defined in subsection (7)), which is a prescribed percentage (the intention is that it will be 60 per cent) of the difference between:

(a) the standard minimum guarantee (discussed in the Notes on section 2); and

(b) the savings credit threshold.

77.     The maximum savings credit is therefore expected to be around:

• £13.80 in the case of a single person (60 per cent of the difference between £100 and £77); and,

• £18.60 in the case of a couple (60 per cent of the difference between £154 and £123).

78.     If the claimant has income in excess of the appropriate minimum guarantee, the savings credit will be adjusted by deducting a prescribed percentage (the intention is that it will be 40 per cent) of the amount by which the claimant's income exceeds the appropriate minimum guarantee.

79.     The effect, based on estimates for 2003, is that normally the savings credit is reduced to nil in the case of a single person if the claimant's income is £135 or more and in the case of a couple if the claimant's income is £201 or more.

80.     The second part of the condition of entitlement in subsection (2) (paragraph (b)) reflects the provision for reducing the amount of savings credit in circumstances where the claimant has income in excess of the appropriate minimum guarantee. The section provides that there is no entitlement to savings credit where the claimant's income is such that the adjustment has the effect of reducing the savings credit to such an extent that none is payable. The same calculation therefore serves to determine both entitlement to, and the amount of, savings credit.

81.     Subsections (2)(b) and (3) together produce the above results by providing that the amount of the savings credit to which a claimant is entitled is the amount by which "amount A" exceeds "amount B" (subsection (3)) and that there must be such an excess if the claimant is to be entitled to savings credit (subsection (2)(b)).

82.     Amount A and amount B are defined in subsection (4), but to find their amount involves some further calculation. The following amounts (all of which have been described either in the Notes on section 2 or in the preceding Notes on this section) must be found in the case of the claimant:

(1) the amount of the "income";

(2) the amount of that income which is "qualifying income";

(3) the "appropriate minimum guarantee";

(4) the "standard minimum guarantee";

(5) the "savings credit threshold"; and,

(6) the "maximum savings credit".

83.     From those amounts two further amounts that need to be known can be calculated:

(7) a prescribed percentage (expected to be 60 per cent) of the amount by which:

(a)     the qualifying income,

exceeds

(b)     the savings credit threshold, and

(8) a prescribed percentage (expected to be 40 per cent) of the amount (if any) by which:

(a)     the claimant's income,

exceeds

(b) the appropriate minimum guarantee.

84.     Subsection (4) defines "amount A" and "amount B".

85.     Amount A will always be amount (7), unless that amount exceeds the maximum savings credit, in which case amount A will be the maximum savings credit.

86.     Amount B will be amount (8) in any case where the claimant's income exceeds the appropriate minimum guarantee. In any other case, amount B will be nil (and the amount of savings credit to which the claimant is entitled will accordingly be amount A without any reduction).

87.     Section 2(6) makes provision for a prescribed amount to be substituted for the reference to the standard minimum guarantee in section 2(3)(a). Where that happens, the claimant's appropriate minimum guarantee will normally be less than if it included the standard minimum guarantee instead of the prescribed amount substituted for it.

88.     That has consequences for the calculation of amount B. Where the standard minimum guarantee is replaced by virtue of section 2(6), a smaller amount of income will be sufficient to exceed the appropriate minimum guarantee and bring the adjusted amount B into operation.

89.     It is not, however, intended that, simply because of the application of regulations under section 2(6), the claimant's savings credit should necessarily be subject to that extra degree of adjustment in all cases where those regulations apply, so subsection (5) confers power by regulations to substitute for the appropriate minimum guarantee a prescribed higher amount, but only for the purpose of finding the amount (8) described above.

90.     The effect of such a substitution is that the amount (8) described above, and accordingly amount B, will be less than it would otherwise be, or will become nil, and so a smaller amount B falls to be set against amount A.

91.     Subsection (8) confers the power to prescribe nil as an amount. This will be exercised to substitute "nil" for the reference to the maximum savings credit in cases corresponding to those in paragraphs 7 and 8 of Schedule 7 to the Income Support (General) Regulations 1987 where a nil amount is prescribed.

92.     That Schedule prevents prisoners, and members of religious orders who are fully maintained by their order, from receiving Income Support. See also paragraph 56 above.

93.     Annex C to these Notes contains worked examples of the operation of the rules for determining the amount of a claimant's savings credit.

Section 4: Exclusions

94.     Section 4(1) provides that Pension Credit shall not be payable to or for a person who is a member of a married or unmarried couple if the other member is entitled to Pension Credit. The intention here is simply to prevent double provision from public funds.

95.     Subsection (2) provides that someone who is subject to immigration control within the meaning of section 115 of the Immigration and Asylum Act 1999 will have no entitlement to Pension Credit.

96.     Subsection (3) reproduces for Pension Credit the power in section 134(4) of the Social Security Contributions and Benefits Act 1992. The intention is that Pension Credit is not to be paid if entitlement is under ten pence a week, unless payment can be combined with payment of another benefit.

Aggregation

Section 5: Income and capital of claimant, spouse etc.

97.     Section 5 provides that any income or capital of the claimant's partner, whether or not they are married, is treated as the income or capital of the claimant for the purposes of the Pension Credit income assessment. This includes the assessment of the guarantee credit (at section 2) and the savings credit (at section 3). In effect this means that the income of a couple, whether married or unmarried, is added together for the purposes of calculating how much Pension Credit they will receive.

98.     This will be the case except in circumstances to be prescribed by the Secretary of State in regulations. There are no immediate plans to use this power to make regulations. A corresponding power exists in relation to Income Support and is replicated here in order to provide sufficient flexibility for the future. If this power were to be used, the effect of not aggregating a couple's income or capital would be to disregard totally the income or capital of the claimant's partner.

Sections 6 to 10: Retirement provision

99.     The social security system requires a claimant to notify benefits administrators of any changes that affect his benefit entitlement. In the case of Pension Credit, this would include any change in income that is taken into account when calculating the rate of Pension Credit. Sections 6 to 10 provide for certain types of income (a person's "retirement provision") to be treated as remaining the same for a period of up to five years ("the assessed income period"). This is subject to routine adjustment for inflation. The effect of this provision is that increases in income do not affect Pension Credit entitlement and therefore do not have to be reported by the claimant during that period. However this does not prevent an increase in the rate of Pension Credit where a person's actual retirement provision is reduced.

100.     A person's retirement provision is any income from a pension (other than one payable under the Social Security Contributions and Benefits Act 1992 or the Social Security Contributions and Benefits (Northern Ireland) Act 1992), an annuity or capital (see section 7(6)). Income from a particular source is referred to as an "element" of retirement provision.

Section 6: Duty to specify assessed income period

101.      The system in sections 6 to 10 can only be used once a claimant attains age 65 or the claimant's spouse or partner attains that age (see subsections (3)(c) and (4)(c)).

102.     If the Secretary of State makes a decision on the claimant's entitlement to Pension Credit and Pension Credit is payable, he must specify an assessed income period in relation to the claimant (see subsections (1), (3) and (4) and also the exceptions in subsections (2) and (3)(d) and section 9(2)). The decision might be the first decision made in relation to the claimant, or it might be a decision revising or superseding an earlier decision (see subsection (3)(b) and sections 8(1), 9 and 10 of the Social Security Act 1998), including a decision on appeal that Pension Credit is payable (subsections (4) and (5)).

Section 7: Fixing of claimant's retirement provision for assessed income period

103.     Specifying an assessed income period has the effect of fixing, for that period, what is to be treated as an element of the claimant's retirement provision (see subsection (3)). Further elements of retirement provision acquired later in the assessed income period are simply disregarded (see subsection (5)). The claimant need not, therefore, report such a further element during the period.

104.     Specifying a period also fixes the amount the claimant receives from each element of his retirement provision (the "assessed amount"), but those assessed amounts are liable to be adjusted in accordance with regulations (see subsections (3) and (4)). The intention is that the regulations will provide for the amount of income from a pension or annuity to be deemed to increase from time to time. This will be in line with the terms of a claimant's pension or annuity arrangements or, if these details cannot be supplied, in line with the uprating of social security benefits. The regulations will also provide for the rate of assumed income from capital to be treated as adjusted from time to time. In some cases, the assessed amount may be deemed to stay the same.

105.     The amounts a claimant is deemed to receive and the amounts actually received may differ. If that works in the claimant's favour, he need not report it during the period. The point of subsection (3) is that a calculation based on deemed amounts is not to be treated as giving rise to an overpayment. If the difference works against the claimant, he may seek a new decision on the amount of his entitlement (see section 8(1)(a) and (b)).

106.     None of the powers in the Act will affect the powers in section 9 of the Social Security Act 1998 which allow the revision of a decision.

Section 8: Fresh determinations increasing claimant's entitlement

107.      The existence of an assessed income period does not prevent a fresh determination of any element of the claimant's retirement provision if it is freshly determined under section 10 of the Social Security Act 1998 and the effect of the fresh determination is to increase his Pension Credit entitlement. There can also be a fresh determination where the supersession decision under section 10 reduces Pension Credit entitlement but the reduction is less than it would have been because another change of circumstances has also been brought into account.

108.     Where there is a fresh determination of any element of retirement provision, that determination applies for the remainder of the assessed income period (subject to any further application of section 8).

109.     The result is that if a claimant wants the Secretary of State to look again at his pension credit entitlement because, for example, part of his retirement provision has gone or yields him less income, section 8 allows the Secretary of State to make a supersession decision under section 10 of the Social Security Act 1998 without interrupting or terminating the assessed income period.

Section 9: Duration of assessed income period

110.     The Secretary of State will not always specify an assessed income period and sometimes he may specify a period of less than five years. This happens if he considers, looking at the claimant's circumstances for the 12 months following the day on which the decision on entitlement takes effect, that the elements of the claimant's retirement provision and their amounts on that day are not likely to be typical (see subsections (1) and (2)). Foreseeable increases in retirement provision (of the sort dealt with in section 7(4)) would not be treated as making a claimant's retirement provision atypical (see subsection (3)).

111.     An assessed income period may end prematurely. Under subsection (4) it will end if:

• the claimant marries or becomes a member of an unmarried couple;

• the claimant ceases to be a member of a couple, by divorce, separation or death;

• the claimant reaches 65 or, if the claimant is a member of a couple, the other member reaches 65.

The Secretary of State may by regulations create exceptions to the general rule in subsection (4). There is no present intention of using that regulation-making power, but the power gives future flexibility. Subsection (5) allows the Secretary of State to make regulations setting out other cases in which the assessed income period will be brought to an end. The power under subsection (5) may be used for cases where a person ceases to satisfy the conditions of entitlement to Pension Credit or where a person goes into residential care. It should be noted that bringing the assessed income period to an end does not necessarily entail bringing a person's entitlement to Pension Credit to an end.

Section 10: Effect of variations under section 7(4)

112.     The provision in section 10 resembles the routine adjustment provisions in sections 159 and 159A of the Social Security Administration Act 1992. Unlike those sections, which are open-ended, this provision operates only while an assessed income period is in force (see subsection (1)).

113.     Any adjustment in the assessed amount of a claimant's retirement provision which is made by regulations under section 7(4) can give rise to an increase or reduction in the claimant's Pension Credit (see subsection (2)). If there is no net effect, a claimant's Pension Credit simply continues at the same amount (see subsection (3)). In any case, there is no need for a new decision by the Secretary of State and there is continuity in the claimant's entitlement to Pension Credit.

Sections 11 to 14: Miscellaneous and supplementary

Section 11: Administration

114.     Section 11 introduces Schedule 1, which makes amendments to the Social Security Administration Act 1992 and the Social Security Act 1998 so as to apply, in the case of Pension Credit, the normal social security rules for claims, decisions and appeals.

Section 12: Polygamous marriages

115.     Section 12(1) describes, for Pension Credit purposes, the conditions for a person to be treated as being in a polygamous marriage.

116.     Subsection (2)(a) confers the power for regulations to prescribe the circumstances in which a member of a polygamous marriage is entitled to Pension Credit.

117.     Subsection (2)(b) and (c) confers the power for regulations to prescribe the level of award of Pension Credit, which may include an amount payable in respect of the second and any subsequent spouse.

118.     Subsection (2)(d) provides for the aggregation of income and capital of all members of a polygamous marriage for the purposes of determining entitlement to Pension Credit.

119.     Subsection (3) allows regulations under this section to modify the Act itself.

Section 13: Transitional provisions

120.     Section 13(1) confers power to make regulations in connection with the introduction of Pension Credit in 2003.

121.     Section 13(2) provides that, in particular, regulations may treat people aged 60 and over who are receiving Income Support immediately before the introduction of Pension Credit as having been awarded, or having made a claim for, Pension Credit. This will remove the need for them to make a separate claim and provide continuity in payment. Also, where an assessed income period of five years would otherwise apply to a person who has reached the qualifying age when Pension Credit is introduced, the regulations will allow for a longer period to apply. This is to avoid the operational problems which could otherwise occur in 2008.

Section 14: Minor and consequential amendments

122.     Section 14 introduces Schedule 2. The amendments of existing legislation in that Schedule are discussed below.

Sections 15 to 17: Interpretation of State Pension Credit provisions

123.     Sections 15 and 16 define what is meant by income for the purposes of the Act. Section 15 confers regulation-making powers, which will allow the Secretary of State to prescribe how a person's income and capital are to be calculated and attributed for the purpose of determining entitlement to the guarantee credit and the savings credit. Section 16(1) contains the definition of "retirement pension income". Section 16(2) confers power to make regulations varying that definition.

Section 15: Income and capital

124.     In section 15, subsection (1) defines income for the purposes of the Act.

• Paragraph (e) includes a regulation-making power which enables the Secretary of State to prescribe those social security benefits that are taken into account in the assessment.

• Paragraph (f) enables further regulations to prescribe the foreign social security benefits that are to count as income. The intention is that this will include any social security benefit paid by the government of a country outside the United Kingdom that is analogous to any of those prescribed under paragraph (e).

• Paragraph (g) brings in war disablement pensions and war widow's or widower's pensions (see the definitions of these terms in section 17(1)), while paragraph (h) brings in their foreign equivalents, paid by governments of countries outside the United Kingdom (again, see the corresponding definitions of these expressions in section 17(1)).

• Paragraph (j) enables regulations to be made bringing in other descriptions of income. It is intended that this power will be used to cover income streams which few pensioners have, such as employers' sick pay or matrimonial maintenance payments. In the future, the power might be exercised to bring new types of income into account.

125.     Subsection (2) confers power to make regulations prescribing how capital holdings will be taken into account in calculating Pension Credit. Normally, capital will be deemed to have an assumed rate of return for purposes of assessing entitlement to the guarantee credit and savings credit. The intention is that a rate of return of £1 a week for every £500 will be applied to capital in excess of £6,000 (£10,000 in cases of people in residential care and nursing homes). Capital below this amount will not be treated as giving rise to income which is to be taken into account in the assessment. Certain types of actual income from capital will be relevant to the assessment. These are limited to income from boarders and sub-tenants in the person's own home and income from certain trusts. Here, there will be different provision as to disregarding income, which will follow the existing provision for Income Support.

126.     Subsections (3) and (4) provide regulation-making powers to prescribe how income and capital will be assessed. The subsections provide that income accrued during any period will be calculated in line with prescribed rules. It is intended that the rules will provide that income may be averaged (see subsection (5)). In averaging income for fluctuating earnings, for example, the Secretary of State may take an average for a past and current period and apply it to a future period.

127.     Subsection (6) confers the power to make regulations prescribing how income and capital will be treated in certain situations. It is intended that Pension Credit will also have the limited income and capital disregards that currently apply in Income Support.

128.     It is also intended that existing provisions in the Income Support (General) Regulations 1987 concerning unacceptable deprivation of income or capital will be applied to Pension Credit with amendments. These will contain provisions which state what is unacceptable deprivation, for example gifts to third parties, and what is not, for example, a claimant repaying a mortgage on their home. Thus, for example, a claimant may be treated as having a notional income from capital no longer in their possession if they have disposed of the capital solely or mainly to secure or increase entitlement to Pension Credit.

Section 16: Retirement pension income

129.     In section 16, subsection (2) allows the Secretary of State to use regulations to add to, vary or remove the descriptions in the list of retirement pension income in subsection (1). This power provides the Secretary of State with the flexibility to change the scope of the scheme where it is appropriate to do so. It will, for example, allow the list of retirement pension income to be amended so that it remains relevant and reflects any future legislative change as regards pensions and other financial products that provide an income in retirement.

Section 17: Other interpretation provisions

130.     Section 17(1) contains definitions of expressions used in the Act.

131.     Subsection (2) confers the power to prescribe in regulations the circumstances in which persons are to be treated, or are not to be treated, (a) as members of the same household or (b) as severely disabled. In practice, questions whether persons are members of the same household arise in only two cases:

• the determination of whether two persons are a "married couple" (see the definition in section 17(1)); and

• the determination of whether the conditions in section 12 (polygamous marriages) are satisfied in any particular case (see subsection (1)(c) of that section).

Effect of guaranteed minimum pension on social security benefits

Section 18: Equal treatment for widows and widowers

132.     Section 18 amends section 47(1) of the Pensions Schemes Act 1993, which sets out when section 46(1) of that Act applies to the widower of an earner. Section 46(1) provides for the amount of certain state retirement, widow's and bereavement benefits to be reduced by the amount of any guaranteed minimum pension also received from a private pension scheme.

133.     Paragraph (a) provides for section 46(1) to apply to a widower who receives widowed parent's allowance.

134.     Paragraph (b) provides for section 46(1) to apply to a widower who is entitled to a retirement pension based upon his wife's contributions, or who would be so entitled were it not for the provisions in section 43(1) of the Social Security Contributions and Benefits Act 1992. These provisions prevent an individual from receiving more than the full amount of retirement pension available to a single person.