A state-backed equity release scheme should be compulsory for asset rich, cash poor pensioners

Retired? Asset rich and cash poor? Too much property, not enough pension?

Good news. An awful lot of brains are looking into solutions for your problems. I wrote here earlier this week about equity release and how that might or might not help. But I also wrote here last year about how it might be an idea for the state to step in and offer a version of less-expensive-than-usual equity release to help cover late in life care costs.

I hate the idea of extending our horribly bloated state any further than we have already. But it makes some sense to ease the lives of the elderly letting them briefly borrow against their houses rather than have to go through all the hassle of selling when they are already suffering.

This idea has now been taken a little further by Professor Les Mayhew and David Smith of Cass Business School. They propose, in a report out today, that people should be able to sell a portion of their house to the state in return for a guaranteed lifetime income. Upon their death, the house would be sold, the debt to the state paid, and any remaining value passed to the heirs.

This makes some sense, and marries nicely with my own thoughts from last year– although the lifetime income bit will need some thought, given that annuities aren’t exactly fashionable at the moment.

But there is a confusing bit in the report for me. It says that the borrowers should not be hit with higher taxes, or suffer the withdrawal of any benefits that they might be already getting. To me, this makes no sense.

Clearly, income created from equity release should not be subject to tax, but there is can of worms in the benefits bit. I have never quite understood why it is that you can own a house outright but still receive benefits paid for by taxpayers  – many of whom probably don’t own a home.

It would make much more sense to me if everyone who owned assets was refused benefits until they had made maximum use of those assets. So surely the beauty of this scheme is that it allows people the dignity of supporting themselves from their houses, without having to actually sell them.

I don’t think we should just be offering state-backed equity release to those are so short of pension income they require taxpayer-funded benefit payments. I think we should be insisting on it – as the first step in the rollback of the payment of taxpayer-funded welfare to people (asset rich, cash poor…) who could actually finance themselves.

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31 Responses

  1. 13/06/2014, JG wrote

    As it stands, I don’t trust the government with my pension money, my NI fund or any other compulsory payments for future benefits, why would I want to give them my house too? Who knows how they would then change the rules in the future?

  2. 13/06/2014, DJC wrote

    Oh Dear! I seem to be on the Socialist Workers Party website when I wanted Money Week. This kind of drivel is exactly why I cancelled my subscription and will never buy Money Week again.

    We are massively overtaxed in the UK. Anyone earning over 35k pays approx 56% tax on their earnings. 40% (IT) + 2% (Employee NI) + 14% (Employers NI) . Money week should be telling this story not pumping out nonsense that only encourage our profligate politicians.

    Also Money Weeks investment advice is rubbish.

    • 18/06/2014, Boris MacDonut wrote

      DJC. No that is incorrect. Someone on £35,000 ,I assume after tax free pension contributions, will pay tax of £5,000 and Nics of £3,000. This represents less than 23% of income. To pay 40% tax one needs to earn about £44,000 but only the bit over £44,000 is taxed at 40%. Likewise nics. The 2% applies over £42,000 .So I fear it is you pumping out nonsense, probably due to a thin grasp of the facts.

      • 19/06/2014, DJC wrote

        That is a marginal rate of tax. For people with children the marginal rate rises further in the 50-60k band to 60-90%. I cannot be bothered to work out the detail as it does not affect me personally. But basically the UK is f*** and any young person with any sense will leave.

        • 19/06/2014, Boris MacDonut wrote

          23% is not a marginal rate. It is the amount someone on £35,000 pays in tax and Nics to help pay for our civilisation in this the 9th richest country in the World. It means someone on £3,000 a month takes home almost £2,300.I cannot see how that means we are as badly off as you say.

  3. 13/06/2014, Clive wrote

    Sorry, bad idea.

    The more money government spends, the more we get taxed. I’m OK with paying tax for hospitals, schools, roads etc., but I’m definitely against the idea of paying more tax because somebody wants to stay in a particular property. Makes no difference to me if they’re old.

    If we go for that, what’s next – couple gets divorced, one partner wants to stay in the house (but can’t afford it), heh, look to the goverment. Or, person loses one job, gets another that pays less, can’t afford the house but wants to stay in it. Again, look to the government.

    Nope.

    Taxes are there for things we need, not simply to satisfy desires. If you can’t afford your house, MOVE !.

    (If the government wants to spend money on housing, let councils borrow money to build property, then sell them in order to bring house prices down. Good for us, cheaper houses, nice little earner for councils).

  4. 13/06/2014, mr clyde wrote

    Merryn, Merryn! Whatever happened to ‘…just sell the wretched thing’?

  5. 13/06/2014, Merryn wrote

    @mrclyde I do think they should just sell it. But if they won’t I don’t see why they should get pension credits from everyone else! @DJC I’d be fascinated to know which part of the argument – that people should rely on themselves not the state – you consider to be socialist nonsense. @JG This is about people who have so little income they require the taxpayer to top them up – no one is saying they must hand over their house to the state, just that if they won’t sell it and live on the proceeds it seems a good idea that they should swap part of it for their taxpayer funded benefits.

    • 14/06/2014, mr clyde wrote

      …They shouldn’t. Care costs are capital means tested, all benefits should be treated similarly.

  6. 13/06/2014, Merryn wrote

    @DJC And I entirely agree that we are massively overtaxed – which is why we must incentivise people to use their assets rather than the welfare state to finance their retirements…

    • 13/06/2014, Clive wrote

      Merryn

      Tell people that they won’t get benefits (at least not for long) if they have huge wealth – in cash or in the form of a property – and they’ll be incentivised – to move !. It’s not fair if we allow the “ah, but, I’ve always lived in this (now) £1m house and I’d rather not move, I’d rather you paid for me”.

  7. 13/06/2014, GFL wrote

    Horrible idea!

    The only idea more horrible than this one was suggesting only nannies should be paid pre-income tax. Merryn, you pretend to be pro lower taxes and simplification – but everything you suggest is even more complicated and full of holes than the current system.

    Maybe apply for Ed’s job after the next election?

  8. 13/06/2014, Merryn wrote

    @GFL OK what do you want to do about old people with huge assets and no cash? Keep paying more and more in tax so they can stay in those houses.. something has to change..

    • 13/06/2014, Clive wrote

      Benefits should only be for those who can’t support themselves. People with “huge assets” in the form of a property don’t come into that category imo. They should be told: you have the means to look after yourself, so do it, taxpayers aren’t going to fund you.

  9. 13/06/2014, Ellen12 wrote

    I think Merryn makes some valid points. If someone has the means to support themselves in their old age but chooses to keep their worth tied up in their valuable homes, the value of their assets, liquid or not, should be used when calculating means tested provisions. Asking younger generations to increase their tax burden to pay for increasing pensioner provision is hard will be hard enough for an increasingly marginalised generation. But to ask them to provide this provision and while the pensioners effectively hoard to pass onto heirs – is too much to ask

  10. 18/06/2014, Boris MacDonut wrote

    So glad that Alan Bennett has put abolkiton of the toffs schools back on the agenda. Get rid of the unlevel playing field and put the money the toffs pay for elitist exclusion into funding a decent system for all.

  11. 19/06/2014, Clive wrote

    So, Oxford educated Alan Bennett is against elitism ? No irony there then. Perhaps we should ban elite education at all levels and educate everybody in a field. Much fairer.

    On a more serious note, role of government is to ensure parents get their kids educated, it isn’t to say they mustn’t try to do better than the state system. Now, that would be unfair.

    • 19/06/2014, Boris MacDonut wrote

      This is a bit off topic but Bennett sees the problem as one of class snobbery. Either fear of the poor or a cliquish desire to mix with the right type. It is well known that kids from well off families do better at state schools than at private ones but that won’t massage their parents egos.
      It is about social mobility somehting the Uk lacks in bucketfuls and Bennet is a good example of the brief periods when a butchers son could still get to Oxbridge on merit. Nowm the toffs are putting up the barricades…..and Bennett is trying to draw attention to this.

  12. 19/06/2014, Critic Al Rick wrote

    A couple of points to throw into the discussion:

    1) Asset rich, cash poor

    I suspect that a lot of such elderly didn’t start off retirement as such; that the situation has been foisted upon them by circumstances out of their control, by circumstances influenced by the self-rigged self-indulgence of the voracious powers-that-be. Orchestrated escalating asset values and erosion of cash value.

    2) The younger generation

    Those that stand to inherit from the asset rich, cash poor elderly may profit more, at the end of the day, by subsidising the cash poor elderly to enable them to remain in their more valuable homes. And so on down the generations…

    In conclusion: in general, it is not the asset rich, cash poor to whom the young should be blaming for their bleak futures, but those self-indulgent extremely rich parasites.

  13. 20/06/2014, DJC wrote

    In the UK due to the mess created by Brown and Osborne we suffer from very high marginal rates of tax. Over 35k if you include Employers NI (which any economist would agrees in a tax paid by employees) the marginal rates are well over 50%. Between 50 and 60k if you have children you have a marginal rate of between 60% and 90%. Between 100k and 120k the rate is over 75%. Anyone repaying a student loan can add 9% to these rates. This is the scandal Money Week should be highlighting not coming up with another idea for state interference. Personally I ensure I earn less than £35k as there no point earning more to pay more than 50% to the government.

    • 20/06/2014, Ellen14 wrote

      I agree that the tax burden is too high, especially taxes relating to income. Income tax takes no account of loans outstanding (mortgages), children under 18, where you are living and how much it costs to live there. If you are paying a mortgage, have young children and are living in London then, as an example, you will probably struggle to survive on £50000. Yet if you live in, say Yorkshire, have no children or mortgage, £50000 will give you an extremely good lifestyle. People who have had children, provided they have brought them up well, have already contributed extensively towards the elderly care system. Maybe this should be taken into the calculation.

      Whatever you think about how much tax ‘should’ be paid, it is grossly unfair for the capital value of a recipients estate to be protected from the recipients cost of care and make every other income producing taxpayer liable just for the benefit of the heirs – unless the heir is actively caring for the elderly person and relies on them for a home.

  14. 21/06/2014, GFL wrote

    DJC no one is paying 90% (income) tax. Keeping your salary purposely below 35k makes absolutely no sense what so ever, while it’s true earnings become less efficient after about 43k you are still never any worse off by earning more since the higher rate of tax is only applied on money above the threshold.

    Someone earning 50k, which IMO is the minimum required if you wish to buy a house in the south east, pays almost 30% of his salary directly to the government (NI and Income Tax). An additional 12% is paid by the employer, which could/would be otherwise paid to the employee. When you factor in VAT, Council tax, TV license, Road-tax, etc, an average earner pays well over half his salary in tax, which is BANANAS!!! The zero percent tax threshold should be raised to 25k

    • 21/06/2014, Clive wrote

      GFL

      “When you factor in VAT, Council tax, TV license, Road-tax, etc, an average earner pays well over half his salary in tax”

      Be interested to see you show that.

  15. 21/06/2014, mr clyde wrote

    Don’t know about 50% but it is quite easy to earn £50k a year and pay <10% in IT & NI.

  16. 21/06/2014, GFL wrote

    Clive,

    Exactly how much tax someone pays is based on a million and one things, so averages are only so useful. I can only give you personal examples for myself and those around me and it does come around 50% – VAT on all my non essential purchases, about £170 just on petrol duty, £220 on council tax, annual holiday duty divided by 12 months, VAT on lease car, etc. And this does not include employer NI – if it did the figure would be even higher.

    But perhaps a non-personal way to calculate how much tax a 50k earner pays is to use the tax-freedom date, which shows 37% tax for employee income (this excludes further tax applied to your money once it is spent) for the ‘average Joe’. Since 50k is practically double the average wage they use in their calculation, I think it’s a safe assumption push that date out to the end of June (at least).

    Have I missed something?

    • 22/06/2014, Clive wrote

      GFL

      Not sure whose site this is, but I found http://www.worksmart.org.uk/tools/tax_calc.php

      Entered £27,500 as my guess of the annual salary of an average Joe (or Jane). It shows about £6,300 taken off for tax/employee NI, around 23%.

      (I don’t count employers NI, as that’s not paid by the employee, and – if it was scrapped – I don’t see the employer handing it on to the employee. Rhetorically, why would they, the employee has already agreed to work for the sum they’re currently being paid)

      What I’m struggling with is, how to get that 23% of salary up to the 50% you suggest.

      • 22/06/2014, GFL wrote

        Clive I have focused on the South East – I’m not sure what the average income here is, but £50k sounds about right, if you want any kind of living standard.

        But even so, let’s look at the UK as a whole and use your figure of £27k.

        Income before Tax: £2250
        Income tax and NI: £470
        Petrol Duty: £120 (assuming you fill up £50 a week)
        Council Tax: £120 (pure guess – in the south east it’s closer to £200)
        VAT on a car spread over its life time, VAT on clothing, VAT eating out, Green taxes on Gas/Electricity, TV licence fee, Alcohol Duty plus VAT, Road Tax, etc: £200 (pure guess, but for illustration only).

        You see if you add the above up, it comes up to about 46%. I’m fully aware the numbers could very massively from person to person and the number of earners in a household makes a huge difference – hence I used the tax freedom date, which says a person earning £27k pays about 37% of his income in direct tax. So someone earning 50k, which I used as an example, pays more than half of his salary in direct tax.

        The purpose of this illustration is to shows how even someone struggling to make ends meet (27k) is paying an astronomical amount of tax considering his VERY restricted life. And someone earning a little more (especially in the south east) pays half his income to the government. Is that not Bananas? Why is this not on the front page of every news paper? This is the cost of living crisis!

        Have I massively overlooked something?

        • 23/06/2014, Clive wrote

          GFL

          Have you overlooked something ? Perhaps.

          I think it’s the way the electorate act that has a massive (upward) effect on the tax they pay. That’s from
          -what they ask for: more benefits, and
          -how they select their political parties: ones that promise them more (benefits)

          People say, sometimes with good reason, “we’re struggling here, we need help with xyz”, i.e. they’re asking for benefits. You can call it other stuff, but if the state is giving you money (or letting you off tax), it’s basically a benefit.

          Problem is that more benefits means more tax for somebody. Hence, as the people ask for more – or simply accept it when politicians offer (e.g. “free” childcare ? “free” school dinners ?) – they’re indirectly asking for somebody’s tax to be increased. Then, people are back to square one, they may have been given more, but somebody is also paying more, so they’ll be asking for more again….

          Politicians should be doing two things
          1) reducing the size of the benefits bill
          2) re-aligning the benefits to those most in need, but that means
          a) taking benefits off one group to
          b) give it to another group.

          (e.g. You said “The zero percent tax threshold should be raised to 25k”. That’s more benefit to somebody – be let off tax – so somebody else will have to pay for that).

          Problem is that 1) and 2)a) are generally unpopular with the electorate, so they don’t get done as often as they should. 2)b) however – handing out more money – is a vote winner with lots of people, so it’s done all the time. Over time, benefits ratchet up and hence so do taxes.

          if people want taxes down dramatically, they need to reduce benefits dramatically. UK Tea Party anyone ?

  17. 22/06/2014, Boris MacDonut wrote

    Clive. You find the same 23% I found. Someone on £27,500 pays 20% of £17,500 (£3,500) and 12.8% of £19,700 (about £2,600). So £6,100/ £27,500 is 22.2%. Of the remainder I assume he thinks £1200 goes on Council tax and about 20% of the rest on VAT but I still only get to 41%. Perhaps he assumes a heavy smoker who drives many, many miles and moves house a lot!

  18. 23/06/2014, GFL wrote

    Haha Boris I’m not assuming the average person is a chain smoker that drives loads of miles and moves house every year. An allowance for £200 for all other taxes is very reasonable. I came up with the figure of 46% in my example – the actual tax burden is 37% for someone on £27k. This makes perfect sense since many households are duel income. So for a single person living alone, 44%-46% is probably about right. But I went with the lower figure of 37% anyway! The point I was making is if someone on £27k pays 37% tax, someone on £50k must pay around 50% – which is Bananas!

    Not to mention inheritance tax and inflation!

    Clive,

    I completely agree with you, benefits are offered to buy votes. But a big reason governments can get away with theft is because it’s almost impossible to know exactly who will pick the tab, also many people do not realise how big the tax burden actually is. People think their quality of life is poor because immigrants are driving down wages or all the jobs have gone abroad, the truth is currency debasement and taxations play a way bigger part.

    At the very least parties should be forced to layout their manifesto like a balance sheet, for each policy a detailed breakdown of how it will be funded.

    We need the media to highlight just how much money is being taken away from us all! I think many people will be shocked.

  19. 24/06/2014, robin wrote

    In my view; we should tax wealth not income.

    By taxing income, and not taxing wealth, we are taxing hard work and indulging the status quo.

    The reason this applies to this article is that I agree we should not allow benefits to be awarded to people who already own their own home. Someone who owns their own home should not need benefits. They should downsize. We shouldn’t live in a country where some groups are entitled to live a privileged life protected by the state.

    Everyone feels sorry for granny who owns in a 3 bed semi but can’t pay the fuel bills, but we don’t give a toss for the 30 year old barista serving coffees who dreams about having a family but can’t afford to. Remember that when you buy your next latte.

    Every few years we are supposed to have a crash where the weaker elements in our economy, such as zombie banks, die out leaving an opportunity for green shoots to grow and profit everyone. We have prevented this crash, supposedly for the benefit of everyone, using QE. The pressure these zombies have on society is still there. High house prices, zero hour contracts etc are the result and the victim in all this is the young.

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