Fool's Eye View

[ November 23, 2000 ]

Pensions Get More Complicated

By Rob Davies (TMFEssex)

Carburton Street, London -- Anyone looking at the mish-mash of benefits for the pensioner very soon retreats with a splitting headache. The sheer complexity of state pensions, SERPS, occupational pensions, personal pensions, annuities, Minimum Income Guarantee (MIG), free TV licences and Winter Fuel allowances is enough to scramble anyone's brain.

Yet the Government is set to make the situation worse by the introduction of the Pension Credit. It has published a white paper (which sets new standards in obfuscation) on the proposal, and has invited comments to be sent to pension-credit-team@ms41.dss.gsi.gov.uk, where I am sure they will be filed and forgotten. Nevertheless, this is an opportunity for us, the public, to tell our lords and masters what we think. But what do we think?

The fundamental problem with pensioners is that some of them are poor. And they are poor because they didn't save enough and they placed too much faith in the state pension. Today the average income of a pensioner is £141 a week, or £7,332 a year. Put another way, that is about one third of the average wage. Not very much when the average family probably spends £200 a week. But the average is a rather meaningless figure. Although there is no analysis of the range of earnings the document does show that, like the population as a whole, richer pensioners have got richer faster than the poorer and median pensioners in the last 20 years. The top fifth have seen a 75% rise in their net income while the bottom quintile have only had a 28% rise since 1979.

To address this problem, and to keep the increasingly vociferous and numerous pension lobby quiet, the Government is going to raise the basic state pension in two steps. This table shows the relevant rates.

Basic state pension (£)

         This Year   Increase   Next Year Increase   The Year After

Single     67.50     5.00       72.50       3.00        75.50
Couples   107.90     8.00       115.90      4.80       120.70

These increases are the exception because, in the long-term, the Government will not restore the earnings link to pensions. However, what it will do is increase the MIG, at the same rate as earnings, so that more cash goes to the poorest pensioners. The state pension is of course a universal benefit and goes to everyone irrespective of need, and that makes it expensive. The MIG only goes to those who do not qualify for the state pension, and have no savings, and it is means tested.

The Minimum Income Guarantees (MIG) rates are (£):

            This Year    Increase   Next Year

Single       78.45        13.70     92.15
Couples     121.95        16.65    140.55

And there is a promise to make the MIG, for a single pensioner, over a £100 a week by 2003. These two tables show that the person who paid nothing into the state pension scheme, and has no savings, actually gets more money than the guy who has a fully paid up state pension. That doesn't seem right and is one issue that the Pension Credit seeks to address. A pensioner is entitled to claim the difference between the state pension and the MIG, but it is reduced by a pound for every pound of income from other sources. Hardly an incentive to encourage people to make their own pension arrangements.

But what is even worse is that the MIG is not payable to anyone with over £8,000 in savings and is reduced by £1 a week, £52 a year, for every £250 of savings in the band from £3,000 to £8,000. That implies that the Government thinks you can earn 20.8% on that capital. Like, show me where! And the bit in-between is where the Pension Credit comes in. In a great act of munificence the Government proposes to raise the lower limit to £6,000 and the upper one to £12,000 as an interim measure. Although the exact details haven't been worked out yet, the idea is that instead of foregoing a pound of MIG for every pound of income, or deemed income earned, only 60p will be clawed back. In other words this is an effective tax rate of 40%, the same as for high earners.

The document says the Government plans eventually to abolish the capital rules and the weekly means test. Income from capital will be assessed in the same way as any other income, which is a step forward. It also suggests the Pension Credit will be integrated into the tax system, but doesn't say how. In addition the paper proposes adjustments to the age related personal tax allowances, so that they rise in line with earnings. And there is the £50 increase in the Winter Fuel allowance, to £200, but that is for this year only.

Basically the aim is for single pensioners to have an income of at least £100 a week, and for pensioners with savings to have at least £135 a week. But the implementation of this mix of pension, pension credit, second pension, and MIG looks horrific to me and the cost of administering it will surely be high. While the aim of the exercise is laudable, the method chosen seems atrocious to me. And we haven't touched the second pension (it will replace SERPS), the Stakeholder Pension or the tax issue yet.

The whole area of legislation for pensions and retirement is a minefield. But it asked us what we think, and for what it is worth, this is what I think.

1) Abolish the requirement to buy an annuity by the age of 75
2) Scrap the rules on imputed income from capital
3) Abolish tax relief for pension contributions. It benefits high earners and Wise institutions far more than the poor.
4) Drop the Pension Credit scheme. It is far too complicated
5) Reinstate tax credits on dividends. That will boost income for pensioners.
6) Ditch free TV licences and the Winter Fuel Payment. They are just gimmicks.
7) Quietly drop SERPS and its replacement, the Second State Pension. They are in a league of their own for complexity. Even the Government doesn't understand them.
8) Abolish Stamp Duty. It is a tax on saving.
9) Forget Stakeholder Pensions, the sums involved will be too small, and the administration costs too high, to make them worthwhile.
10) Use the money saved from all these schemes to abolish National Insurance contributions. Let the public make their own choices on saving for their old age.
11) Keep the MIG as safety net.
12)Let the state pension wither away

The basic idea behind these suggestions is to simplify things, and encourage people to invest for their retirement through the stock market. It won't happen, of course.

Where Next?

• Rob Davies interviews Frank Field, M.P.
• This thread on the pension board is already discussing the issue.
• This is the document in question
• And this is where you send your suggestions: pension-credit-team@ms41.dss.gsi.gov.uk