Tax them, don't axe them – pensioner benefit reforms should not be done on the hoof – Ros Altmann

    Ros is a leading authority on both private and state pensions,annuities and
    retirement policy. Numerous major awards have recognised her work to
    demystify finance and make pensions work better for people.

  • Ros Altmann

    Ros Altmann

    Tax them, don't axe them – pensioner benefit reforms should not be done on the hoof

    Tax them, don't axe them – pensioner benefit reforms should not be done on the hoof

    Tax them, don’t axe them – pensioner benefit reforms should not be done on the hoof

    by Dr. Ros Altmann

    (All material on this page is subject to copyright and must not be reproduced without the author’s permission.)

    – Taxing is far better than axing

    Consider changing
    the age of entitlement, rather than means-testing

    Pensioner benefits becoming a
    political football.
    The furore over pensioner ‘benefits’ is
    hotting up. As the number of UK citizens reaching state pension age
    soars, the cost of paying National Insurance pensions was always
    bound to rise. There is a political backlash against pensioner
    payments, but it is important to consider this issue carefully.
    Rather than using pensions as a political football, it is important
    to assess the situation comprehensively.

    Substantial pension cuts are
    already in the pipeline.
    The reality is that the bill for future
    state pensions has already been reduced significantly, by raising
    state pension age and reducing the generosity of the future state
    pension. As a result of the coming state pension reforms, millions
    of pensioners will end up with lower state pensions in future than
    under the current system.

    Two elements are being conflated:
    It is very important not to address this issue in a knee-jerk
    fashion. Let’s think carefully about what is involved. There are
    two parts to this debate.

    National Insurance pension triple
    lock on Basic State Pension only.
    Firstly, the national
    insurance state pension increases are under consideration. This is
    the element of our national insurance system which people have paid
    into all their lives – they have contributed to their future state
    pension and, even after a full working life, the value of the UK
    Basic State Pension at the moment is just £113-10 a week. This is
    the part that David Cameron has pledged to ‘triple lock’ by
    making sure that at least until 2020, the Basic State Pension will
    rise by the higher of inflation (measured by cpi consumer prices
    index), earnings or 2.5%.

    No triple lock protection for
    There are also additional elements of state pension,
    such as Graduated Pension, State Earnings Related Pension (SERPS) and
    State Second Pension (S2P) but all these are not part of the promise
    of the ‘triple lock’ and are only guaranteed to rise in line with
    cpi inflation.

    Triple lock on Basic State
    Pension will still mean UK has one of lowest state pensions.
    promise to continue to increase the pensioners’ £113-10 a week
    state pension by at least 2.5% a year is surely the very least that
    pensioners could expect – our Basic Pension remains one of the
    lowest in the developed world. Pensioner inflation rate is already
    far higher than for other age groups and many pensioners struggle to
    make ends meet unless they have private savings. Even those with
    savings have seen their income disappear as rates are so low. From
    2016, a new flat rate state pension may start, but most pensioners
    will not be in the new system by 2020, so the Prime Minister’s
    pledge really affects older citizens, rather than those newly

    So many bits of Pensioner
    Secondly, there are additional pensioner
    ‘benefits’ that are paid to all those above a certain age. These
    payments include free travel (bus or train passes for senior
    citizens), free TV licences from age 75, free prescriptions and
    medical tests, as well as Winter Fuel Payments of £200 a year (or
    £300 a year for the over 80s). The value of these benefits adds up
    to significant extra sums for many individuals, depending on whether
    or not they are used. I believe it is this area of state spending
    that needs to be carefully examined, but in a considered manner,
    rather than just using them as a political football.

    They could be taxed to save
    These pensioner payments are, in general, tax free. That
    means they are worth far more to higher income pensioners.
    Significant sums could be saved by taxing these payments, which would
    be much better policy than trying to strip them from what are often
    called ‘better off’ pensioners.

    Where would you draw the line as
    to who qualifies as a ‘well off’ pensioner?
    If it is only
    those on top rate tax, then very little money would be saved because
    only around 2% of pensioners actually pay higher rate tax. If we
    take benefits away from all pensioners and force them to claim
    means-testing, then those who have saved for their future will be
    penalised relative to those who did not or could not do so. This
    would be a powerful disincentive to save in future pensions.

    Streamline the age at which
    benefits start.
    The age at which many of these benefits are paid
    could also be debated. The current system has different benefits
    starting at different ages and there seems little rhyme or reason to
    the decisions as to which benefits begin when. For example, free bus
    or train travel can start at age 60, while TV licences are received
    at age 75. Winter Fuel Payments start from state age at £200 a
    year, but then go up to £300 a year from age 80 – all of these tax
    free. Let us decide what the appropriate age should be for the
    benefits with a proper review of pensioner support and how it is

    Free travel only off-peak or
    starting at a later age would save significant amounts.
    travel from a later age, and perhaps only offering travel for free if
    it is off-peak, would save money, without taking the payments away
    from pensioners who see their bus passes as a lifeline that enables
    them to get out and about and keeps them fitter and more active.
    These benefits could also be taxable which would raise revenue
    without adding to means-testing burdens or increasing disincentives
    to save.

    Means-testing would be a huge
    The whole thrust of state pension reform from 2016 has
    been designed to ensure a simpler pension system without mass
    means-testing. If the Winter Fuel and other payments were then
    means-tested instead, the whole agenda of reform that tries to
    encourage additional private pension saving would be undermined. As
    auto-enrolment spreads to all workers, the last thing we need is to
    bring back mass means-testing for millions of pensioners. This would
    send the message that only those who do not bother or cannot afford
    to save for retirement will receive the pensioner benefits later on,
    while those who do manage to set aside money for retirement will be
    penalised in the state pension system. This may be popular with
    those who want to take money from older people in order to cut public
    spending, but it would be a retrograde step for pensions policy in
    the longer term.

    Let’s hope policymakers
    recognise the need for proper considered reform rather than pandering
    to populist rhetoric. Taxing is far better than axing benefits and
    streamlining them is much more sensible than stripping them away.

    Dr. Ros Altmann
    6 January 2014

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