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A consumer’s view – Lorna Bourke

With the election out of the way, we can concentrate on the issue which dare not speak its name – pensions. Labour refused to be drawn on its intentions during the pre-election period but the subject is now the biggest and most pressing issue that the Government faces.

There are as many definitions of the problem as there are potential solutions and the only thing on which everyone is agreed is that something must be done to avert a crisis.

You cannot encourage people to save for retirement in isolation, you have to look at the state pension in conjunction with priv- ate pensions or you perpetuate the current difficulty whereby the availability of non-contributory state benefits deters the lower-earning half of the population from saving for retirement.

Compulsion is one ans-wer but the most radical solution, put forward rec- ently by Dr Andrew Hilton, director of the Centre for the Study of Financial Innovation, is also the simplest. Unfortunately, like most common-sense approaches, it is controversial.

The UK is the only developed country where the state retirement pension is below the official poverty level of 10,000 a year. The basic state pension for a single person is just 4,266 a year. If this is the pensioner’s only income, they will qualify for pension cre-dit which brings their inc-ome up to 5,460 a year plus council tax benefit and housing benefit.

Widespread support is growing for a citizen’s pension based on residency in this country rather than National Insurance contributions at a rate of around 20-25 per cent of average earnings or 6,000 a year. It would be earnings-linked rather than prices-linked.

That is the easy part. How do we pay for it? Given that roughly half of all pensioners qualify for some sort of means-tested benefit, the cost of increasing the basic state pension to 6,000 a year would be around 10bn extra a year.

It would cost the Treasury little or nothing extra to increase the basic state pension to 6,000 for the five million pensioners who are already getting means- tested pension credit and other benefits.

The actual cost would probably be lower than 10bn a year as there would be a tax clawback from wealthier pensioners.

Dr Hilton suggests that the citizen’s pension should be paid for by abolishing all tax relief on savings on the grounds that this benefits the relatively rich at the expense of the poor.

He says: “Given fairly convincing academic work that tax breaks do not increase the total pot of savings and that they merely encour- age the rich and slick to shuffle their investments around, we should abolish all tax breaks on all forms of sav- ings and use this extra Government revenue to fund the citizen’s pension.”

This would more than cover the costs. The loss to the Revenue through tax relief on pension contributions alone is estimated by Gordon Brown’s former economic adviser Ed Balls at 8.9bn a year, half of which, incidentally, goes to higher-rate taxpayers. Do away with Isa tax relief and you are there.

Hilton says: “Boost the state pension to a level at which people can live with dignity, fund that by abolishing all tax incentives on sav- ings and then walk away. If people want to save, they will and the absence of tax breaks will not stop them. If they don’t, at least they will not starve to death.”

Dr Hilton’s proposals have much to recommend them but they deal with only half the problem. If we make no changes at all, there is little doubt that final-salary defined benefit pensions have had their day.

They are no longer affordable because of the open-ended commitment that they represent and their potential to bankrupt the sponsoring company.

But if we are not to have a nation of pensioner haves and have-nots, the Government must also reform public sector pensions which are now overgenerous and a massive and increasing burden on all taxpayers.

Perhaps Adair Turner can be called upon to produce a second report on how to solve the public sector pension problem and bring it into line with the reduced expectations of private sector employees.

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