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Unlucky 13p tax rise dogs Brown’s pension credit

The Times’ economic editor Anatole Kaletsky easily wins my accolade for the most thoughtful and far-reaching piece on the general election campaign.

Kaletsky finds it surprising that pensions and health have not been centre-stage in the election campaign. Public expenditure on these two items dominates the core of taxpayers’ resources. Pensions and health are the two biggest sources of Government spending as a percentage of GDP.

Equally surprising is the commitment of the Tory party to match Labour’s health budget and go further than the Government by promising to index the state pension to earnings’ increases – for the term of a Parliament at least.

These commitments to significant increases in public expenditure are being made at a time when the numbers of people over 65 are rising swiftly as a proportion of the total population.

If these trends go unchallenged, public expenditure is bound to rise rapidly in Britain. Put more brutally, taxes will rise even faster than in the recent past and the tax take will rise as a proportion of GDP.

The one area where Kaletsky has particular praise for the Chancellor Gordon Brown is in his insistence on linking the state retirement pension to price increases and helping the poorest pensioners by way of means-testing.

There is one severe drawback with the Chancellor’s approach. It will not be successful in the longer run. Already, the emphasis on giving means-tested help to a growing proportion of pensioners has played a major part in the collapse in savings. More, not fewer, people in the future will be dependent on means-tested benefits and, on the Chancellor’s own calculations, pension credit will cost an additional 13p on the standard rate of tax by 2050.

None of the parties has proposals that will prevent the growing domination of state expenditure over the coming decades.

The Pensions Reform Group has an alternative to the current consensus on a rising tax take. Put simply, the group proposes to keep the existing pay-as-you-go National Insurance retirement pension and build on to it a funded scheme which will grow in importance over time. The aim is to pay a pension which takes everybody above means-testing so that the whole population will once again know that it pays to save.

Of course, voters are not going to trust politicians with the safekeeping of these pension savings and the PRG proposes a governance structure similar to that of the Bank of England’s monetary policy committee. Governments will have a say on the appointment of the governors. However, the governors will be guaranteed independence and they will have the task of proposing trustees, who will be elected by the membership and will be responsible for managing the fund (see www.

The PRG’s proposal for a universal protected pension does not solve at a single stroke the dilemma so vividly posed by Kaletsky but it does offer long-term pension reforms that will have a consensus among voters. For some extraordinary reason, the debate so far has been trying to devise a consensus among politicians.

Once voters have a growing stake in the funded universal protected pension, they will ensure that those simple folk who act as their representatives will be brought into line and reflect their consensus.

By bringing everybody into the same scheme and by limiting compulsion to finance a scheme to pay a universal pension so as to float everybody off of means-testing, the PRG reform ensures a reining back of means-tested welfare.

Huge savings in public expenditure will result – enough to make free of tax all pension income from whatever source.

Above all, the reform creates pensions that work with the grain of human nature. As the universal pension will take them above means-tested assistance, everyone will know that they will keep their savings. Likewise, the reform makes the job of the IFA once again possible.

With the universal protected pension coming into force, IFAs will no longer be accused of selling products to individuals who would be better off spending their money and relying on means-testing. Overall, pension savings would increase significantly and that would be good, too, for the economy.


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