Paying for a Citizen’s Pension

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The Citizen’s Pension is a big idea of Steve Webb, our Pension Minister and is a bolstered state pension that lifts people out of pensioner poverty and does away with means tested benefits.    

I think it’s a good idea.    

The Citizens Pension would have to be paid for by Treasury Funds and as the outgoing Chancellor famously commented – there isn’t any money left.    

Economists see sense in a Citizen’s pension and are beginning to wonder how it could be afforded.    

Michael Johnson is such an economist. His ideas have been widely listened to and adopted by Government. If I can simplify his arguments they run as follows    

  1. It is a good thing to have a Citizen’s pension
  2. We can’t afford it
  3. To afford it we need to cut higher rate tax relief for those saving into pensions

We can be grateful to Michael Johnson as he can be credited with introducing the idea of  the Pensions Allowance – it curbs the super rich from getting pension awards of more than £40,000 per year without those awards being treated as taxable. While there have been a few small fish getting caught in the big fish net, most reasonable people think that the Pension Contribution Allowance is a good thing.    

But his idea of restricting tax relief on pensions to 20% will fall flat on its face. It won’t raise the required revenues he says it will because companies will encourage higher rate taxpayers to swap salary for pension contributions. This will be a pain for companies in terms of administrative and legal costs and a pain for the Treasury to legislate against. We shouldn’t go there.    

Most especially we shouldn’t go down the route of further pension and savings reform until we have bedded in the reforms that are on the table and are about to be enacted after extensive consultation.    

The idea is also unfair as pensions attract higher rate tax in payment meaning that you might pay more rather than less tax by saving through a pension. Michael argues that the long-term goal of government should be to abolish higher-rate tax for pensioners. This will be scant comfort to those affected by his proposals today.    

Either tax-avoidance measures will nullify the revenues or the public outcry will lead to a mass desertion from pensions. Bottom line this is a half-cocked measure.    

I think Michael knows it. At the recent FT pension conference he more or less admitted as much when he reluctantly endorsed the need for compulsory retirement savings. Compulsion is a draconian measure and in its wake comes a number of other “nasties”. Once you compel people to save, you can get rid of tax-relief altogether as you have broken the social contract between the state and the citizen. Compulsion is the easy cop-out.    

If instead of compulsion we have impulsion through auto-enrolment, it will undoubtedly come at a cost to the Treasury as Michael accepts. Auto-enrolment actually defers the implementation of a Citizen’s Pension as it takes yet more revenue out of the system. Millions of new savers will be getting tax-relief rather than paying tax. This is why Steve Webb has reluctantly accepted he cannot have both.    

Michael accepts the value of auto-enrolment but rejects the needs for NEST. He is wrong to think that the private sector can take up the slack created if NEST was not to be pursued. There is no appetite among the insurers of personal pensions to cross-subsidise the pensions of the low paid.    

Ultimately Michael must accept that we can’t afford to pay for the Citizens Pension  by scrapping NEST or by abolishing  Higher Rate Tax on pension contributions or even by scrapping means-tested benefits in retirement. Not with the current state of the country’s finances.    

If we had embarked on a wholesale reform of our country’s pension provision when we had the chance-specifically when Frank Field was given the mandate to think the unthinkable in 1997 or when Brown and Blair went to war on this in 2004 or in the glory years that preceded the credit crunch, we might have seen something happen. That we didn’t is one of the failures of the Blair years.    

We do not have the money to make wholesale reforms today, we must make the best of the    limited resources at our disposal, the opportunities of auto-enrolment and the investment already sunk into NEST.    

When we have digested auto-enrolment and introduced NEST then we can look again at the Citizen’s Pension.    

When we have got that sorted, we can start looking at the ISA/pension harmonisation issues that form the basis of Michael’s current thinking.    

BUT NOT TILL THEN.    

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to Paying for a Citizen’s Pension

  1. Robin says:

    What I don’t understand is why we are trying to move away from higher tax rates. David Cameron admitted last week that the reason for cutting the deficit is to cut taxes. Surely it is the low rate taxation that we need to cut not the high rate. We need to be moving to a position certainly where the first £20,000 of taxable income is free of tax (and no I don’t and have never, voted LibDem).

    We also need to move to a position where ALL benefits are paid tax free.

    And why oh why do we employ one set of people to pay government employed people and then another set of people to take some of it back again in the form of taxation? All government employees should be paid at a nett of tax rate. And we should use computer technology to move from the silly step changes in taxation to a smooth curve where your tax take is directly proportional to your total income from all sources (and I mean ALL).

    And if all this means more tax take from the rich, so what, they are the ones who can afford it. But of course with a cabinet largely populated with millionaires this isn’t going to happen.

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