Pensions: We’ve been duped for 30 years – this is how to stop it, Part 2
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In a speech last week Nigel Farage formally committed Reform UK to the state pension triple lock if he wins the next election, promising to fund this by cutting the benefits bill. How, he didn’t say, suggesting a failure to understand the nature of the bottomless pension pit problem. It’s one that faces him or any incoming government, the truth of which is that the pensions system itself is one great benefits scam. This was clearly explained by Chris Philp in three articles he wrote for TCW earlier this year. We are republishing them this week under a more forthright heading in the hope of getting the message across, not just to Nigel Farage, but to Ben Habib and Rupert Lowe as well.
Philp’s challenge to these leaders of new parties on the ‘right’ is twofold. First, for them to call out the two parties of government responsible over 30 years for wrecking the original auto-enrolment scheme that made working people save for pensions; turning it into a benefits scheme which allows people to avoid work for life. How this was done incrementally they can read in Parts 1 and 2. Second, for them to bold enough to announce the solutions he sets out in Part 3 – including limiting the pension rights of anyone not working a total of 35 years (including all recent arrivals, but not limited to them).
Today Philp addresses some of the myths which have been touted and the facts which have been misrepresented in discussion of pensions in recent years.
You can read Part 1 here.
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Myth: Pensions are tax-free
CONTRIBUTING to a personal or company pension may be tax-free, but drawing income from a pension is not.
The best deal you’ll ever get from any financial product is tax relief at one end only. With pensions you get the relief when putting the money in, and you get taxed when you take it out. With ISAs it’s the other way round – you put taxed money in, you pay no tax when you draw the money out.
So payments from a pension to an individual are treated as income: it doesn’t matter how they get the money – via an annuity, income drawdown or any other method – pensioners simply pay income tax if their total income is above the personal allowance, just like anyone else. In reality, contributing to a pension fund is ‘deferred taxation’, it is not ‘tax-free’.
The tax-free cash aspect of personal pensions is of course genuinely tax-free; it’s offered by government as a savings mechanism in the same vein as ISAs etc. It’s how many people repay their mortgage while also saving for retirement.
Myth: There are lots of millionaire pensioners
This is a deliberate misrepresentation by politicians, largely of the socialist persuasion. They add up the total value of a person or a couple in retirement, including the house they paid off over years of working and their pension pots. The average personal pension pot is around £300k and many people can own a house worth £400k or more by the time they retire. In the world of the green-eyed socialist, two pension pots plus a house makes a couple ‘millionaires’.
Of course, this ignores the fact that those assets and the State pension are all they have for the rest of their lives, unless . . .
Myth: Pensioners don’t work or earn
Many pensioners pay tax not only on what they receive from their pensions, but also because they choose to work (or, increasingly, they need to work).
In fact, in recent times they have had to invent a word for drawing money from a pension – it’s now called ‘crystallisation’ (taking benefits) because this is not the same as ‘retirement’ (stopping work). All income goes into the pot for income tax: State and/or personal pension income, income from work, rental, savings/investment – you name it, it’s all assessed for tax, in exactly the same tax bands as everyone else.
Fact: Governments do not publish statistics on how State Pensions are earned
There are no detailed official statistics publicly available which show how many people got their NI qualifying years from paid NI contributions through working versus those with ‘soft’ NI credits from the various giveaways discussed in Part 1.
HMRC and the Department for Work and Pensions hold detailed NI records data, but we don’t get to see this critical information.
Clearly, this gap limits clear public understanding of what proportion of claimants earned all their NI through working versus receiving credits.
Note: there is a dataset known as ‘L2’ (the DWP Lifetime Labour Market Database) but it is only a 1 per cent sample and full access is restricted to projects approved by the government as being in the public interest. (For a moment there it felt as if I was writing about North Korea.)
Fact: Governments do not invest to provide state pensions
This is well known but seems to be poorly understood. It would be called ‘a Ponzi scheme’ (i.e. illegal) if any other pension provider tried to do this.
NI was originally a levy to pay for the State pension (and two other entitlements: out of work benefits and use of the NHS) of which only State pension entitlement is still based on NI contributions.
Government does not use any part of the levy to invest, it simply pays out from receipts taken in from new members (just what Charles Ponzi was locked up for). The key difference is that Ponzi didn’t do it transparently, whereas government does. What this means for UK pensions is that the approach becomes legitimate by virtue of being an inter-generational contract. So when I see younger people whinging about ‘paying for pensioners’ the degree of ignorance makes my blood boil – perhaps they should just be thankful for this . . .
Fact: The UK pension is the lowest of all developed countries
That simple fact needs no further explanation. It’s a national disgrace. Those living on only the state pension in the UK are extremely poor, many need to continue working – and with repeated freezes to the Personal Allowance, the State pension is coming perilously close to the point at which people will pay tax on it. Which is why . . .
Fact: The triple lock was invented because of pensioner poverty
The triple lock was designed to prevent pensioners becoming poorer relative to the rest of society. Advocating to remove the triple lock is saying in effect that it’s ok if pensioners become increasingly poor, both in relative terms and in real terms.
Most of the people who are held up as examples of pensioners being ‘rich’ are from that generation when final salary schemes were available from private sector firms, or who have significant personal pensions. Such people will have been higher earners who therefore paid their NI and, as such, they receive their pension as a matter of contractual entitlement.
Getting all green-eyed about such people is socialism at its worst. But in any case, those days are gone, along with the final salary schemes which made them possible (Gordon Brown’s ‘legacy’).
The simple fact about the triple lock is that its effect is magnified massively by the giveaways discussed in Part 1. If it were being applied only to those who have paid for their pension through paying NI, on a pre-1996 basis, it would be comfortably affordable.
Fact: Public sector pensions are a real cost to the taxpayer at all levels of government
Public sector pensions are paid at much higher levels than is generally seen in the private sector – and of course this is all paid from the tax take from the private sector.
State pension: ~12.7million recipients costing ~£110billion per year
Public sector pensions: ~3 million recipients costing ~£57billion per year
So former public sector employees make up roughly one quarter the number of State pension recipients, but they’re costing over half as much money. And that’s before you might weed out all the giveaways referred to in Part 1, which would cut the State pension cost by more than half.
Some of the reasons are:
• Employer contributions in public sector schemes average 27 per cent of salary, compared with 4.18 per cent in the private sector.
• Public sector workers retire earlier and live longer on average.
• Public sector pensions are inflation-linked.
The old social contract for the public sector used to be ‘Lower pay today, higher pension tomorrow plus security’.
This changed as private sector pay fell from the financial crash onwards and again during the pandemic, while public sector pay was protected by pay-freeze rules. So now we have a situation where public sector pay is no longer low, but their taxpayer-funded pensions are still very high – and they get to retire early as well.
The new public sector social contract is now: ‘Comparable salary + much higher pension + higher job security + earlier retirement’.
It’s not sustainable.
Tomorrow: How the problem could be solved.
