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Change by degrees

A £140 state pension for all certainly caught the nation’s attention this week. Coming hot on the heels of a sensible decision on tax relief, pension aficionados could be forgiven for thinking Christmas had come early.

Whether we can afford to give every pensioner £140 a week state pension is another question. The estimated annual cost of the basic state pension this tax year is £55.8bn. On top of that, another £13.7bn goes on state second pension (and Serps) and £8bn on pension credit – a total of £77.5bn.

Then there is the retired population over state pension age – 7.7 million women over 60 and 4.5 million men over 65 – a total of 12.2 million.

Dividing one by the other reveals that we currently spend £6,352 a year, or £122 a week, on state pensions for each pensioner. If £122 costs £77.5bn, then £140 costs £90bn – an increase of £12.5bn a year.

This is similar to the cost of building four new aircraft carriers a year, every year. And if we were finding it difficult to scrape together the readies for two one-off carriers, how can we afford to build four a year? Such basic maths tells us, first, that these changes will not be immediate and, second, that they will be accompanied by other changes that make them more affordable.

Higher state pension ages are one way in which to cut the cost but even the savings from putting the retirement age up to 66 will not be felt in full until 2020.
Another more immediate way to introduce these changes would be to give every pensioner the higher amount but then tax it back from ones that do not need it. No pensioner would be worse off but those on higher incomes would not feel the benefit of any increase.

But taxing higher-income pensioners an extra £12.5bn a year, even if you had given them a bigger state pension to start with, would create more than a bit of chatter down at the golf club.

Slowly and gradually is the answer. Raise the state pension age a bit earlier than planned. Freeze the age allowance income limit and allow fiscal creep to work its magic. Freeze pension credit and so on.

There are other issues to deal with, such as, what happens to those who already have or expect more than £140? Or those who have contracted out and only get the basic pension of £97 a week – surely we are not going to top them up to £140?

These are not simple problems to solve but the intention is clearly there to simplify the state pension system. We should not be disappointed that this might take 10 or 15 years. At least we can say to people under the age of 50 or 55: “It pays to save in a pension, no matter what your circumstances.” A good year for pensions just got a whole lot better.

John Lawson is head of pensions policy at Standard Life


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