Pensions: what you are not being told

Today’s Government Green Paper maps out an entirely new future for Britain’s currently meagre state pension. You might call it a Retirement Revolution masterminded by the LibDem academic turned Pensions Minister Steve Webb.

It stands to affect everybody in Britain who is not already drawing their pension. And whilst there is much to praise, there is definitely more than immediately meets the eye in these Government plans.

A quick reminder of the basics of the current system: there is a flat basic state pension. At the moment, in the tax year ending this week a single pensioner receives just under £98 pounds a week. This is well below the poverty line. So for the poorest pensioners the last Government topped it up through the Pensions Credit – to about £133 a week. This extra credit was means tested – and as a result more than a million pensioners didn’t even apply for it.

So now the Coalition wants everyone to get a new higher basic state pension of £140 pounds – which everyone gets – with no need for top-ups. So it is goodbye to the Pension Credit. This will eventually take every pensioner above the poverty line — in theory abolishing pensioner poverty.

So there are clear winners: and remember we are talking about future generations of retirees here, post 2015.

1. Poorer pensioners win by getting a little bit more: about £7 a week. (Don’t fall for the comparison with £155. Like-for-like a move from £133 to £140).
2. One million-plus underclaimers benefit the most – by the £40 a week that they weren’t claiming. This raises interesting dilemmas about progressivity. If they really needed the money, would they not have claimed it?
3. Separately stay-at-home mothers will find that their years looking after children will no longer decrease their state pensions.

But as Steve Webb admitted to Jon Snow on tonight’s Channel 4 News, all the winners, the giveaways will be paid for by takeaways elsewhere. And wheras the Government has been keen to push the radicalism and generosity of its plans, it seems rather more shy about explaining who will lose.

So let me tell you. There will be millions of losers too. Going back to the current system — there is another way to increase that basic state pension. Middle and high earners can double their state retirement pension through the State Second Pension, also known as Serps –  where as you have paid more you get more pension up to about £200 a week. That is set for the chop, the State Second Pension abolished, as everyone will get that flat £140 a week. That creates a band of losers from the people who would have retired on a topped up state pension of over £140. No numbers in the Green Paper. But it doesnt end there.

Millions of workers who currently opt out of the State Second Pension pay a lower rate of national insurance – a tax bonus of 1.6 p in the pound (currently charged 9.4p v 11p – 10.4p v 12p from the end of the week). Under these plans that process, known as “contracting out”, ends. So millions of workers, primarily public sector workers, could see a hefty tax rise. And this could come on top of the 3p in the pound contribution already planned announced by the Coalition for keeping their defined benefit pensions scheme. Ouch! Though importantly, they’d be rewarded with a better state pension – £140 instead of £98, in today’s money.

Now we get to the big money. If you include the eradication of employers’ contracting out, ie the abolition of their even larger national insurance break of 3.7p in the pound (9.1p v 12.8p – 10.1p v 13.8p from later in the week), this could raise an epic amount of money for the Treasury. DWP insiders talk of £6billion a year.

Don’t take my word for it, have a look at the Osborne-appointed Office for Tax Simplification’s recent review.

Let me quote:  “This relief was introduced in 1961. It is unclear what the original policy rationale was”.

It puts the cost of this relief in the currently ending financial year at an incredible £9.1 billion per year. It is already ending for defined contribution pensioners. About £6 billion PER YEAR could be raised in taxes by these plans, which is apart from the other measures which pay for each other.

In fact even the other week at the Budget the Treasury had a little nibble at this money through a DWP announcement (Line 25, Table 2.1, Budget) –  “Implement Actuary’s ‘best estimate’ approach on contracted-out rebates from 2012-13”. Raises £620m a year on average after 2012.

Of course such a move would surely utterly decimate what little remains of final salary pensions schemes, as the CBI and EEF quietly warned today. It is important to note that about half of this is paid by public sector employers, so I can’t quite work out the net fiscal impact of this without my calculator. But it is a substantial wildcard in the debate about public sector pensions.

So are we left with a revolution? A system that would be simpler, yes But one with losers and winners for future generations of retirees. Where the state provides enough for you to avoid poverty but leaves it to you to fund a retirement with any luxury. The plan – to stir Britain to relearn the savings habit, at a time when negative real interest rates mean it’s never been less lucrative.