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Should the state pension be means-tested?

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Prime Minister David Cameron kicked off this year’s electioneering with a pledge to keep the triple lock on pensions until 2020.

Cameron is guaranteeing the state pension will rise in line with earnings, inflation or 2.5 per cent whichever is highest.

The state pension is a universal benefit so the generous pledge will apply to millionaires and the poorest alike, guaranteeing them the kind of long-term rises today’s workers can only dream of in terms of earnings growth.

Help for the wealthiest pensioners doesn’t end there. At Prime Minister’s Questions yesterday, Cameron hinted he would keep universal pensioner benefits such as free TV licences and winter fuel payments because it would “not raise much money”.

Meanwhile, Chancellor George Osborne is targeting the under 25s using housing benefit as part of £12bn further welfare cuts after the next election.

Speaking to Money Marketing, Conservative MP Mark Garnier says: “There is a debate over whether any benefits should go to higher rate taxpayers irrespective of what they are.

“The problem is if you start mucking around with these sort of pensioner benefits it can cost more than you save. I understand we are talking about tens of millions of pounds.

“Pensioners also have little wiggle room because you have spent your life preparing for retirement and you don’t have much opportunity to change your circumstances.”

Why would the Government hit the young so hard on welfare given the economic backdrop of high youth unemployment, falling wages and expensive tuition fees? It’s simple – votes.

Wealthy pensioners vote in larger numbers than youngsters so they are seemingly immune from the welfare axe and, with the triple lock in place, are actually forcing deeper cuts in other areas.

In this context, it was refreshing to hear this week of some fresh ideas from the Institute of Economic Affairs, the free market thinktank favoured by Margaret Thatcher.

In a paper published yesterday, the IEA called for the state pension to be means-tested so it acts only as a support for the poorest.

In its place would be an Australian-style system of compulsory pension saving, requiring employees to save 9 per cent of their salaries and possibly higher.

It would be auto-enrolment on steroids and generate private pension pots for individuals rather than a taxpayer-funded defined benefit scheme.

Companies have decided DB schemes are no longer affordable, so why should the taxpayers fund the biggest and most expensive DB scheme of all?

Forty Two Wealth Management partner Alan Dick says: “The state pension is a giant Ponzi scheme. It only works if the population keeps getting richer so it has to change and be paid for in advance.”

The young employee struggling for a pay rise and saving for a house deposit is effectively funding the globe-trotting lifestyles of millionaire pensioners.

Yes, pensioners have made National Insurance contributions all their working lives but NI has long been another income tax in all but name.

The state pension was designed for an era of far lower life expectancy and to stop the elderly falling into poverty, not to boost Sir Alex Ferguson’s income by £107 a week.

The modern replacement is compulsory saving into a private pension. There are myriad problems in the private pensions market to clean up – just look at last year’s Office for Fair Trading report into the DC market – but the principle of compulsory saving is a sound one.

The state should be focusing on the poorest but when wealthy pensioners hold such sway at the ballot box change seems unlikely any time soon.

Samuel Dale is politics reporter at Money Marketing – follow him on Twitter here

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Comments

There are 10 comments at the moment, we would love to hear your opinion too.

  1. It already is in that it is the first income to be counted thus any further taxable income or gains will be subject to tax at it’s highest marginal rate.

    Means testing is not the issue, it is the age at which the BSP is drawn from and for how long that is the elephant in the room.

  2. Why should the people who have funded the lazy and devious over the years (as well as the deserving cases) be excluded from this benefit. Besides they are a very small number compared to the masses and it isn’t going to save a lot of money as HMRC are going to lose the 40 or 50% tax take from the higher earners.
    It will cost more to means test than the cost of the “savings”

  3. The point of the flat rate State pension was to avoid penalising pensioners who had made some savings; or to be more accurate, to avoid accusations of mis-selling auto enrolment to the uninformed public for the benefit of the taxpayer. To means test the BSP would reverse this development before it even started.

    The writer above claims that NICs were originally intended to provide State benefits but have long since simply become another form of tax, albeit a tax only paid by employees. I think that is probably right but what is to stop a compulsory pension saving being any different. OK, so the new pension saving is DC rather than DB but so what?

    The IEA intend that NICs continue to be paid (p48) so a 9% compulsory pension should be paid in addition to current NICs. Why not just increase the tax rates by 9%? The extra tax revenue would comfortably fund the current BSP for the foreseeable future.

    The reason – the public understand a 9% increase in tax rates but pensions confuse them. And votes would be lost. For proof consider the public response to the proposals for a flat rate BSP and the abolition of S2P. An increase from £110 to £140 SAVES the taxpayer money so there must be more losers than winners yet the media outcry has just not happened. Too complicated; too many variables.

    The IEA plan is just another way of taxing the public without them noticing.

  4. there is little incentive for people to save for their future as it is, if you add means tests to pension benefits then no-one will bother at all. Auto-enrolment would then be the next big mis-selling scandal as well.

  5. Bit of an odd debate without the detail. Means tested at what rate? Presumably they will count other pension benefits first. Will it be £1 less of State Pension for each £1 of private pension? Will it be (say) means tested so that anyone with say more than £20k private gets cut back? Will it be tiered?

    Just imagine if the above is the case. It will be an encouragement just to opt out of AE. Will a husband and wife’s individual pensions be aggregated for this purpose? Will this apply to partners as well? If it’s not an ‘official’ partnership then how will this be managed?

    More holes than a gruyere cheese and loads of scope for some imaginative planning.

    As ever these Stink Tanks are so divorced from the real world as to make much of their prognostications valueless. Who pays them for this and ought the payers to be asking for a refund?

    Compulsory contributions? We don’t have a large enough army to handle the riots and revolution. Most people think they already have compulsory contributions – tax. Will tax =rates be reduced to compensate? Dream on! So it will be just regarded as an additional tax. As has already been said the Government should ‘man up’ face their responsibilities, make the retirement age 70 and increase Income Tax to cover a decent pension. It is the State’s responsibility – not private enterprise.

  6. I agree with Keith.

  7. Look if you take BSP and then have other pensions, plus savings income then once you go over the £41k limit you pay higher taxes and so on. So it is a sterile discussion. Whereas employers of low paid workers pay them less because they know the employee will get their benefits topped up.

    So the no brainer is to remove benefits from the low paid and force their employers to pay them more.

  8. Some excellent comments to a shallow article written by a seemingly envious, callow youth.

  9. So lets see:

    1. Those who have saved for retirement well get less or nothing despite having paid into the system.
    2. Those who haven’t saved for retirement either because they were unable to get more despite not having paid into the system.

    Unless there is a massive reduction in NI rates I can’t see this being a vote winner.

  10. Has anyone heard any rumours about what is happening at Pru – are they preparing to sell of their UK arm now that they have a new Hong Kong company set up? Share price seems to suggest that there is some activity going on behind the scenes. I guess all will come out in the wash!

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