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?

  • William Macdonald

    I think a citizens pension, similar to NZ, would be a good system. In the UK it costs the government a small fortune to keep track of everyone’s contribution. A simple qualification of over 65 and living in UK for more than 5 years would cut the costs hugely, and allow a more generous pension.

    • Tony Conrad

      So a good thing to aim for is to get into the UK five years before you are sixty five then you can enjoy a pension for life without having paid a penny.

  • Apollocreed

    This article overlooks the point that private pension funds invest in British businesses and have a more long-term and responsible commitment to their investments than short-term traders. The funding that pension funds provide to business lead to economic growth and jobs for the entire population.

    This article is suggesting replacing saving and investment for the future with consumption of the tax breaks in the present. However, long-term GDP growth is directly correlated with the savings rate. Countries with higher savings rates have higher growth and vice versa.

  • Cameron Holder

    Government pensions are a pyramid scheme that we need to get away from, i.e. my tax is paying my parents pension and I’m hoping someone will pay mine in 30 years. We have to get away from this and I think the UK is doing the right thing by incentivising private pensions. What you are proposing reverses that, it will look good in the short term but in the long term it will be a disaster.

    I’d rather keep incentives to save into a private pension and cut pension payments to pensionable age people who earn more than a certain amount of money. That way we may eventually get to a place where government pension isn’t needed.

  • AAJ

    The ISA is a move in direction of giving up tax release on contributions. Personally, I don’t like it.

    If you completely remove the ability for someone to get tax relief on their pension contributions, then there is no longer such a thing as a pension. It’ll simply be a savings account. What will happen is that people may pay into it, then later they;ll need the money for something and take it out again.

  • Bern Taylor

    It is a simplistic fallacy to suggest that the government has any funds. They only ever have tax receipts, or amounts borrowed in anticipation of future tax receipts, to spend. Removing tax relief from pension contributions would result in people with larger pensions stopping contributing to them, and instead investing the amounts in tax-efficient areas which would maintain a low tax take. As a result the amount of tax that could be diverted to immediate pension boosts for the lower paid would fall short of the advertised amount. This would negatively influence people with smaller pension pots, and they would follow with similar investment diversions. As a result taxpayers would be funding a pension increase without any matching tax saving to pay for it.

  • Alan Summerfield

    I have always said that you cannot rely on the Government to keep you and this scheme will merely push us all into the Governments arms and destroy all ambitions to try to make things better for yourself.
    Would you really trust that this or any future Government to maintain it ? I don’t, as the entire tax take (including NI & VAT) just goes into big pot and the Chancellor does what he want with it.

  • Brucie

    In theory, the sentiment behind the idea of abolishing all tax relief & transferring the savings to the state pension seems attractive, however, I have 2 concerns. The first is timing, it would have to be phased in to stop “fat cat” OAPs (like me) getting a huge windfall. For example, current OAPs have lived through a lifetime of being fully aware that we had to add to our state benefits via other means; that our pension provision becomes more competitive once these “other means” are added suggests that many of us took heed. Which leads me to my 2nd concern & that is the new scheme would discourage self reliance. This would, in my view, be a flawed direction to take; the fact is that the state will never be able to afford taking full responsibility for all of us, we have to play our part. I do, however, think that it would be a “no brainer” to reduce tax relief to the basic level for all.

    • 4caster

      Like the new state pension (29% up on the old one), any upgrade will not apply to existing pensioners.

      • Anthony Brett

        I paid more than a fair share of tax was not allow to save in private pension wrong type of income till mr brown come a long than I was to old to make it worth while,
        However I still saved and if it was mean tested as I said no state pension for me.
        The state has run out of money mainly by wasting so much including on the SS but that’s how it is , we need to stop spending the states money like this
        So we can give the young hope instead of a bloody great interest bill

  • Anthony Brett

    There’s is a easier way just force every body to pay more into private pensions
    Stop all tax relief on Pensions and mean test the state pension once you income reach say thirty thousand no state pension and as over time more people will reach this sum the government can make a start on paying back all the money in the last few years they spend on the never never

    • 4caster

      So those of us who paid national insurance contributions all our working lives, and never claimed on them, and supported old age pensioners and sick disabled and unemployed workers throughout our working lives, will not be able to recover any of our outlay after we have retired: all because we were sensible and put money aside into a pension scheme to give us a better retirement.

      • Brucie

        National Insurance is just a tax, it’s not hypothecated in any way, it’s just put into the general pot so that the government of the day can boast a tax rate of 20% when, in reality, it’s 32%; of course, more recently it has also allowed them to start collecting tax at about £8k – well below the alleged personal allowance we all have.
        Am I cynical – yes, but not as cynical as a whole succession of governments who assume the general public won’t notice the subterfuge – sadly a correct assumption !

  • Russell Bruce

    You are going a bit left wing there Merryn. Yet you chose to critcize the Scottish Government for cutting tax at the bottom with only small increases at higher and additional rates. Few will lose out on their skiing holidays.

    But it is good to challenge. Pension tax changes are only a matter of time. Remember mortgage tax relief? A flat rate of 20% is generous enough as it is 20 % of the total sum, including relief, so a real rate of return of 25%. Try getting that on any other investment inside 6 weeks.
    Problems for an economy like the UK with low growth rates, rising inflation and Brexit devaluation is the churn contracts as low and middle income earners pull back on spending. With GDP highly dependent on consumption, earnings growth for low and medium earners is needed to to spark confidence and a sense of wellbeing in the population. High earners save too much and not enough of those savings end up pushing investment and R&D. With increased earning equality money will flow and that is the trigger that will pull business investment plans off the back burner.
    The Phillips Curve is not operating as it should through a prolonged earnings squeeze. A little inflation from wage increases is of much more economic value than inflation driven by UK longterm sterling devaluation.

    • Philip Gosling

      Trouble is politicians are always playing around with pensions and if we are being asked to put more into pensions why bother when Government changes the rules every year and unless you are very rich the state will provide everything anyway. Most of us might be better off going on a nice 2 week holiday eery year for 40 years than lose the £80,000 in care home fees.

  • Mark Antrobus

    Remember that private pensions are subject to income tax upon withdrawal. So if all tax relief is abolished [as opposed to restricted] then there is simply no point in contributing to a private or for that matter an occupational pension. In effect they will be abolished – and the effect of this be to make people even more dependent on the state. Bad idea.

  • 4caster

    Your proposal amounts to double taxation. No-one will invest tax-paid income into a pension fund, the proceeds of which are going to be taxed again. ISAs are better because capital gains are tax-free, and withdrawals from ISAs are tax-free too.

  • 4caster

    Singapore’s Central Provident Fund (CPF) is a better system. It is a compulsory savings scheme, funded by employers, in proportion to earnings. There is no element of redistribution, and everyone has his or her discrete account. Withdrawals can be made to fund healthcare and home purchase, but nothing else until retirement age is reached. The CPF invests long-term in home and worldwide industry as well as government bonds.

  • Tony Conrad

    The government is in debt to about £17trillion. They just look forward each month to all the tax receipts they get which will never be enough to clear the national debt which seems to be increasing. If these creditors or even some of them called in the loans it will affect everything, not least the national pension. The borrower will always be servant to the lender. A dicy road they are moving on.