A quick and simple way to give everybody a bigger state pension

A few weeks ago the Organisation for Economic Co-operation and Development (OECD) produced numbers on the various levels of pension provision in its member countries.

At first glance, the UK didn’t look great. Our state pension is the least generous out there – giving people an average income of just 29% of their working incomes. Miserable. However, look wider and things don’t look so bad at all.

It turns out that the UK has a much higher level of private pension provision than most countries (the highest in the world). Add that in, and you get to an average of about 62%.

You may have spotted a problem here: the better off in the UK are likely to have much better pension provision than everyone else, thanks in part to our fairly generous system of pension tax relief. So relative to systems in the rest of the OECD, ours is skewed towards the top end.

There has been endless discussion over the last decade as to how we should deal with this. We have already cut pension saving allowances for high earners (down to £10,000 a year) and put in a place a meagre (relative to the past) lifetime pension saving limit of just over £1m.

But should we cut the relief given to higher and additional rate taxpayers by more? Should we go for a flat rate of 20% or 30%, for example? I wonder if we shouldn’t do some rather more radical – and an awful lot more simple. Pension tax relief today costs us around £50bn a year. We spend £90bn a year on our state pension – with the new flat-rate full state pension being £8,290 a year (the 29% above is based on the old lower rate, by the way).

Imagine that we cancelled all pension tax relief immediately and added the sum spent on relief to the sum already spent on the state pension (around £100bn). Divide by the number of people of state pension age in the UK (around 12.3 million people) and you get £12,200. Be a bit meaner and take into account the millions of people not entitled to the full state pension and you can push the number for those who are up to more like £14,000 plus. That is not a bad pension at all. Thoughts?

disfi.com