The National Lottery runs a game called “Set For Life” in which people can enter for a chance of winning £10,000 a month for the next 30 years. As with all lotteries, the chances are vanishingly small (you’d need to play every week for tens of thousands of years to have a statistically significant chance of winning) but the premise is enticing, because it puts a lottery win into real money. Ten grand a month is an amount the player can imagine spending. Let’s imagine you won this fantastic prize. Nice! Life is now a big, glorious party. But here’s a question: do you still need to claim benefits from the state?
This question is pertinent because around 42,000 people in the UK are in exactly this position. According to the most recently available data, that’s how many people have at least £3m in private pension savings. A pension pot of £3m will pay out about £10,000 a month. And all of these people will also (assuming they have built up the correct eligibility) automatically receive the state pension at retirement age. This cohort of lottery winners, who are getting at least £10,000 a month from their private pensions, could receive up to £526,999,200 a year from the taxpayer (a figure that will rise with the triple lock). Some will never have worked. Some wouldn’t even notice if their state pensions were taken away. And yet the UK is handing them about as much as it spends on libraries.
The new Chancellor, John Healey, faces a long list of fiscal questions, most of which are very difficult to answer. But he also faces a question that could be answered by any Year 3 pupil: should people with millions of pounds of their own retirement savings also get free money from the government?
This is also an important fiscal question, because the number of people involved is higher than 42,000. According to the most recent ONS numbers, there are 1,103,000 people with private pension pots over £1m. The least wealthy of these people has an income (from their pension alone) of more than £42,000 per year. A basic multiplication of this number of people by the current state pension payment suggests the UK could be handing up to £13.8bn a year in state pension payments to people to whom it makes next to no difference.
The calculation isn’t that simple, of course. The state pension is counted as taxable income, so a fair bit of this is clawed back from the millionaires. Statistics on wealth in the UK are also to be handled with caution, because the Office for National Statistics admitted last year that the core data collected by the Wealth and Assets Survey isn’t of high enough quality to be accredited as national statistics. Estimates of pension wealth are also inherently uncertain, because they involve guessing how much things will be worth in future (the Institute for Fiscal Studies recently published an interesting report which challenges the way pension wealth has been calculated in the past). As with any form of wealth tax, a successful change to the current system would rely on the government becoming much better at measuring wealth. And yet, despite all this uncertainty, we can still declare the central fact that the government pays billions of pounds in state pension payments to rich people for whom it is, as I’ve heard one wealthy pensioner describe it, “Champagne money”.
And to be clear, these 1,103,000 people are multi-millionaires. Someone who has built up a million-pound pension pot does not have that as their only wealth. We can infer from other wealth data that the average private-pension millionaire would have a similar amount in property wealth, and something like half that amount again in other financial and physical assets. We’re talking about people who pay no rent, have no mortgage, and who receive other investment income. They already have a lot of Champagne money.
As soon as means-testing the state pension is suggested, someone will claim that they’ve worked hard and paid in to the National Insurance system all their lives, and that they are entitled to the returns in retirement. They’re wrong. National Insurance is not a pension pot. It is a hypothecated tax. National Insurance payments are not invested on your behalf; they are paid to people who had already retired. It’s just current taxation and current spending. It’s just income tax, and the persistent confusion around it would be dispelled if Healey also decided to follow Jeremy Hunt’s advice and get rid of National Insurance, replacing the 8 per cent NICs charge with a 5 per cent rise in income tax.
So why has no-one done this? A cynic might suggest that it’s to do with who gets to build up these chunky pension pots. The civil service pension scheme pays 28.97 per cent employer contributions (ten times the statutory minimum paid by many private sector employers). Other public-sector workers in the NHS, education, local government and the armed forces also enjoy pensions that are very generous and would be vigorously defended by their unions.
However, this is also another reason to challenge the state pension’s status as an unquestionable universal benefit. Those generous public-sector pensions are, like the state pension, unfunded (meaning there is no pot of investments providing the returns – they are paid from our taxes). When investors look at buying the UK’s debt, they take into account the £1.4 trillion (and rising) in liabilities this creates, and they charge us more to borrow. If public sector pay is tilted more towards salaries than pensions, it might, in the long term, also help to reduce the UK’s immense debt bill.
There’s no point pretending this policy couldn’t go horribly wrong. You can have a well-meaning idea for reform social care funding but, as Gordon Brown and Theresa May found, this can be quickly rebranded as a “death tax” or a “dementia tax”. But challenging unnecessary state pension payments would be fiscally conservative, so the market won’t mind, and Burnham and Healey have a working majority of 167 MPs. If you can’t defend ending the payment of state benefits to people who are literally on lottery-winner money, are you really in power?
[Further reading: Is Mississippi really wealthier than the UK?]
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Subscribe here to commentThis is the politics of envy and demonstrates a lack of understanding. Those of us at pension age are not getting a benefit, but deferred income, we contributed our national insurance for our pension, and our pensions are paid in terms of our National Insurance contribution. To claim that Pensions are paid out of current tax income may be technically true but that is to fall into the neoliberal trap of treating the finance of the state as if it is a household budget.
My private pension ensures that I don’t have to subsist on Pension credit, not that I am rich beyond the dreams of avarice
We are told that there are all of 42,000 obscenely rich people who don’t need their state pension, so the system is to be changed because of a few very rich people who should be being taxed more severely than they are? Catch yourself on!
What we have is classic small state neoliberalism, in what use to be a more understanding paper. The correct way is universal provision, and the taxing of those with the ability to refund the state.
I suggest that you take your ideas to the Spectator where they would fit into the politics and the economics, except that the Spectator readers are often the ones with the big private pension pot.
An indication of how far to the right the Staggers has moved in recent years, sadly.
I don’t think it’s anything to do with the “politics of envy” (a totally meaningless concept anyway). It’s just a Tory slogan. Envy implies you want other people’s wealth for yourself, and I don’t think that’s what is going on.
But I wonder about the advisability of messing around in a way that could “go horribly wrong”, as the article puts it. I have the state pension, a partial Civil Service pension (based on a few years’ service) and a small private pension. The total is just about enough, so I certainly don’t want to risk any of it going horrible wrong. But the basic principle of the welfare state (whatever the deluded Thatcher thought of it) is that benefits go to all, and those who don’t need it pay it back through tax. Yes, it’s a clumsy system, but so are they all. The point is, though, that those who do need it still get it, whatever the fluctuations in economic fortune.
There is a fundamental problem of economic inequality throughout the Western world, and it’s a problem because most of the very wealthy have done little or nothing to earn their wealth. They claim they have, of course, but all they’ve really done is sat on their assets and watch them increase as quantitative easing works its dubious magic. The huge transfer of wealth from poorer to richer people is unearned, undeserved, and must be reversed, before society falls apart. Pensions and pensioners must surely play their part in this.
Reform and Restore are the writing on the wall. If they win power, they will soon demonstrate their complete inability to govern by enacting the old Tory policy of tax cuts (on steroids this time). And their complete inability to understand scientific evidence (such as that concerning climate change). After that it may be too late.
This proposal is not aimed at people who need to be rescued from the pension credit threshold.
As he says, there are over 1m of us who clearly do not need the state pension. I give mine to charity, but it might be better if the state was spending it on our collective interests. Pension entitlement is based on NI record, but there is no fund.
The state pension is a benefit paid for by other people, not a deferred income in any sense. The average worker would have to work for 100 years to pay for the kind of income that they can expect from the state pension over the average lifespan.
At the very least there should be the option of easily opting out of the state pension, for those better of people with a trace of a conscience.
At face value the argument is irrefutable. In actuality it would be disastrous. As soon as a benefit ceases to be universal, that hands carte blanche to politicians to salami-slice it away as fiscal considerations dictate. It won’t just be ‘millionaires’. It will move on to those with public sector pension pots, those with more than £750k, those with more than £500k, rthose with more than £250k and so on. Playing into the hands of libertarians
The main problems with Will Dunn’s argument, from a left-wing perspective are that: universality ensures all eligible receive without stigma and administrative costs are kept low, whereas, once some are excluded, you get interminable arguments about where the threshold should be, unfairness from cliff edges or administrative complications from tapering; and many who need help are too proud to claim or find the process too complicated and information too obscure to make it worth it. I’m old enough to recall a time when we had more universality, but the welfare state – which has the virtues of strengthening social ties – now exists only for the elderly. We used to believe in/apply more universality in benefits alongside sharply progressive tax rates on income. Tax rates on high incomes have come down along with the erosion of universality. The massive growth in inequality would now probably be addressed better by shifting taxation from income to wealth, a major and controversial undertaking, but a lot of expert work has been done on this. Meanwhile, a simple and long overdue measure would be to equate income tax and capital gains tax. Longer term, while the historical reason for introducing National Insurance rather than simply raising income tax levels is understandable, it makes no sense now to tax working more heavily than income from other sources.
When I became a Civil Servant in 1996, my offer letter contained the information that my actual salary would be 8.25% lower than what the Civil Service would have paid me, this being my notional employee contribution to what became known later as the Classic pension scheme. By this approach, which later was called “salary sacrifice” the Civil Service not only saved on salaries, but also reduced their employers’ NI contribution. When this is taken into account the 28.97% is rather less generous than it first appears. As my Civil Service pension also only increases in line with CPI rather than the “triple lock” of the State Pension it has become a progressively smaller part of my total income over the nearly two decades since I retired from the Civil Service, aged 60. We need to remember that it was the Thatcher government’s unlinking of the State Pension from earnings that led to increased pensioner poverty in the following decades and to the introduction of the “triple lock” to reverse this.
I suspect one reason for paying state pension to everyone is that means-testing it would be complex and costly. There would be a huge extra layer of bureaucracy where pensioners would all have to declare their income and savings, there would be endless arguments and challenges about where the threshold should be set, and there would be many people who ended up feeling unfairly disadvantaged for all sorts of reasons. Spent your entire career being promised that you’d get a state pension at the end of it? Well you were foolish enough to build up some savings, so no pension for you. Had you known, you might have frittered more of it away while you had the chance, but it’s too late now. And what about non-liquid wealth, e.g. you’ve spent your life in a family home that’s now worth quite a lot because of property price inflation, but you don’t have much actual money.
I agree that paying a pension to those who really don’t need it seems crazy, but the reality of the alternative could end up so painful and costly that the status quo may be preferable.
Perhaps the simplest option would be for everyone to be entitled to a pension, but to make it opt-in, i.e. you’d have to apply for it. I suspect that many of those millionaires and billionaires wouldn’t bother, which would save some money with a minimum of extra bureaucracy, and no complaints.
“Perhaps the simplest option would be for everyone to be entitled to a pension, but to make it opt-in,”
Point of information – the state pension is *not* paid automatically: you have to actively claim it when you reach state pension age (or at any point after). So the option to opt-out of it if you feel you are rich enough already exists. I suspect very few do.
I’m constantly amazed at the levels of ignorance and contradictory thinking amongst (younger?) journalists when it comes to discussions about pensions. Many people have hefty personal and/or occupational pensions because until recently the assumption was that the state pension was being allowed to wither on the vine and so you’d better make your own arrangements if you didn’t want to be poor in retirement. Thanks to stock market booms a lot of these personal arrangements did far better than expected, which, when coupled with the long-overdue move to restore the real value of the state pension, means we have a lot of rich pensioners. So: tax them more. Don’t start farting around with an easy to administer universal benefit.
Also: if the state pension starts to become a liveable sum of money, then there will be less need for today’s workers to have to save so much out of current income for retirement, thus easing a cost of living pressure. So what we also need is a clearly-stated policy objective for the triple-lock – at what increased level of state pension will it stop (x% of average earnings? A defined sum of money?) and will that new enhanced value of state pension be maintained in real terms so that future generations can rely on it? This is another social care question which needs serious multi-decade thinking. Not “I hate rich boomers so take away their pensions” drivel.
Then NHS and the state pension and so on – we all pay for them through various forms of taxation, and we’re all entitled to benefit from them. If you start playing around with that simple notion, you end up treating those benefits not as rights but as charity. Uggghh.
We need to save money on pension payments. Only 13% of people make enough contributions over their working lifetime to justify the amount they receive in pension. I know! Let’s stop the pensions of that 13%! D’oh! Why didn’t we think of that before! Aren’t we lucky to have people like Will Dunn to solve our problems for us!
It is the lack of courage by government that enables the rich to employ tax accountants to claim sufficient tax allowances to pay their salaries. So it is with benefits and their right to get 40% allowance on their private pension contributions. Starmer thought the likes of myself and another million oldies would not mind losing our Winter Fuel Allowance. Silly boy. I agree that millionaires should be allowed to tick a box on their tax return to prevent the payment of a government pension. Polly Toynbee has been advocating this for years but there is no courage in people who depend on public approval to win elections. I get a pension of £1300 a year for my three years in uniform despite only paying 1 shilling and three pence a week in NI.There are many people out there who, with some encouragement, could develop a proper State Pension scheme which would be acceptable to the majority of voters. Why not assemble a working party to put it together?
Yes, Will. God forbid that the people who worked their whole lives, who paid in their whole lives, should ever receive any benefits! We need that money to fund infinity benefits for immigrants!
Talk of pensions is curious in the UK – let’s compare ourselves to our near neighbours, say Belgium where I worked for 9 years. The state pension is based on what I paid in so I end up with Euro 10K per year which is roughly £9K. In the UK after 35 years plus work I get a flat rate £12547 per year because I contributed NI for part or all of 35 qualitfying years. Even my work at the Co-op in the summers of 1975 and 1976 count as two qualifying years when I was a student. My point is that the UK pension is not a pension that any reasonable country would recognise but a flat rate social security benefit to prevent destitution in retirement. If I had carried on filling freezers at the Co-op in Luton for 35 years I would get the same pension as I get today but I worked in middle management for US corporations so I paid in quite a lot more NI than my parallel universe self at the Co-op. Now I depend on a private pension pot which is invested in the stock market so I do not need the UK state ‘pension’. The UK and Belgian pensions amount to a tidy sum and I have a small final salary pension. I could afford to lose the UK ‘pension’ but where do you draw the line and how do you sell that to voters. As ever the UK political class has placed itself in a trap of its own making. I look forward with interest to how the politicians deal with this almighty mess. Expediently I presume.
I agree in principle and I am not a millionaire retiree. However there would need to be some cogniscance of other family responsibilities. For instance, my wife age 61 has not worked for 10 years and for the 10 years prior to that part time only for minimum hourly rate. She has never in her life claimed any sort of benefit whatsoever and I have been her sole means of financial support. So my pension supports us both until she gets her state pension. In scenarios like this (and there must be others) we should be looked at as a couple when it comes to assessment of taxing or removal of the state pension.
This article repeats several common misunderstandings about national insurance and the social security system.
Firstly, national insurance is part of the social contract. Contributions from workers and employers go into the National Insurance Fund, which is exclusively for earnings-replacement benefits when employment is interrupted or ended (and a small percentage goes to the NHS). It operates as ‘social insurance’ as it’s ‘pay as you go’ (paying benefits to current claimants), not an individual savings pot (like private insurance/pensions). Unlike private cover, national insurance pools risks across the population, with rules decided by policy-makers and Parliament for society as a whole.
Secondly, national insurance contributions (NICs) differ from income tax. They are levied on earned income and earmarked for contributory benefits, whereas income tax applies to other incomes and can be spent on whatever the Government decides. Also, NICs establish an individual’s future entitlement to contributory benefits.
Thirdly, the article implies that entitlement to a state pension is automatic. That’s not the case. Someone must make a claim for a state pension otherwise they will be treated as if they’ve deferred it. Whether someone qualifies and for how much depends on whether they have paid or been credited with NICs. Credits include periods of parenting /caring / training etc. So someone will have worked and / or participated in society (such as through caring), to get a state pension – the post-2016 scheme requires someone to have at least 10 qualifying years (producing an earnings factor of at least 52 x the lower earnings limit for that year).
The fourth misunderstanding repeated in the article is that benefits should only go to people on low incomes. But we have a ‘mixed economy’ of social security – not all benefits are means-tested (nor should they be). Social security isn’t just to alleviate poverty – its functions include preventing poverty, sharing risks, offering individuals income security and acting as an economic stabiliser for society. Social security also distributes income to people at different points across their lives and to different groups depending on need (such as for disability). And different types of benefit (contributory, categorical, means-tested) together meet these functions.
So the answer to the question should wealthy people get the state pension is Yes – because they have already contributed.
But should they be taxed more? Most definitely. More progressive taxation of income (and wealth) should be the mechanism for tackling any so-called ‘champagne money’.
Means-testing the state pension would just weaken the contributory system for all of us.
Full marks for Will for making this long overdue argument. While some of the comments here have some merit, there is just no way Britain can pay welfare to 100% of over 65s when they are 20% of the population and growing – especially when a large cohort of them have all the money, party unearned. Sure there are other benefits to be trimmed and taxes that could be raised but this “champagne money” is a colossal waste that is an order of magnitude larger than many other tax and spending issues that get coverage. There is no savings pot, just a sense of entitlement to something that is completely unaffordable. With the current aged “boomers” now all retired and national debt at 95% of GDP, something big has to give before the rising cost of government debt forces more reduced spending or the crisis among young working age people (so well covered in the New Statesman) gets ever more grave. Rather than compare to other European countries that have even worse unfunded liabilities to the old, it’s worth noting that Australia means tests its old age pension. And its national debt is 19% of GDP.