Everyone who makes sufficient National Insurance contributions is entitled to a payout in retirement, the result’s of this month’s RP Inquiry suggests.
A proposal to exclude the richest people in the UK from receiving the state pension has been overwhelming rejected by advisers.
This month’s RP Inquiry followed suggestions by Paris-based think tank the Organisation for Economic Co-operation and Development (OECD) to end pension payments to the wealthiest 5% to 10% of the population.
It claimed this would allow the government to spend more money on benefits for people in greater need of support.
The OECD highlighted the fact that the UK is faced with an ageing population, comprised of more pensioners and fewer people of working age.
A matter of fairness
RP asked readers whether they thought it would be fair, in principle, to exclude the richest 5% or 10% of retirees from receiving the state pension. More than two-thirds (67%) said no, 29% said yes and 4% were unsure (see chart 1, above).
The majority of respondents who answered no argued that anyone who has made sufficient National Insurance contributions for the required number of years should be entitled to the state pension, regardless of their financial situation.
One reader said: “This isn’t a state benefit but an entitlement, so it is unlike means-tested benefits.”
Another argued: “A universal benefit is exactly that. Universally available for the purpose it states in a country by its government.
“In a civilised country these principles should remain to prevent poverty in the older age group. Rich people pay into the system via additional taxes.
“More should be publicised to highlight the positive economic benefits of eradicating not just absolute, but relative, poverty.”
One reader pointed out that if only 5% or 10% of retirees are affected, it will not result in big savings for the government. Others had concerns that the measure could be widened to exclude the wealthy from free NHS treatment.
One respondent said: “This is a very bad idea. Once it starts, the amount will come down and down. When will people realise that in destroying the pension system, we are leaving a legacy where all pensioners are far poorer in the future?”
Of those who thought the wealthy should miss out on the state pension, one reader suggested all higher rate taxpayers should be excluded while another said anyone who earns over £100,000 should be excluded.
Several respondents thought the state pension should be means tested in line with other state benefits. One reader added: “The harsh reality is that the system is unsustainable and something has to give.”
Applying the proposal
Regardless of whether the proposal is fair or not, there is also the matter of its implementation.
When asked whether the proposal would be too complicated to introduce in practice, 54% of respondents answered yes, 33% no and 13% were unsure (see chart 2, above).
Of those who said yes, several were concerned about how the government would determine the richest people. There would need to be a very clear definition of what income and assets are included.
One respondent asked: “How do you measure ‘rich’? Is it the value of assets? In which case no one in London or the South East will receive [the state pension].”
Another pointed out that people’s wealth would need to be re-tested at frequent intervals and that some retirees would drift in and out of the qualification. Others warned that wealthy people could try to play the system or even leave the country.
Of those who answered no, some readers thought the proposal could be implemented by using the current tax system, in a similar way to child benefit.
“It would not be difficult to introduce as the government already has a great deal of info about the tax-paying populace and modern computer systems should be able to cope,” one respondent said.
Saving up
Some experts have argued that excluding the wealthy from the state pension would put people off saving for retirement.
But just 25% of respondents to the Inquiry agreed with this statement, against 60% who disagreed and 15% who were unsure (see chart 3, above).
Of the 60% who thought people would not be put off saving, one said: “As long as the taper was fair and progressive, people could see that they would still be better off for every £1 saved.”
Another answered: “Despite all the reductions, caveats and other impediments to pension saving, people are still trying to structure a decent retirement income.”
Of those who agreed with the statement, one reader questioned how savers would know how much they would have in 30 to 40 years’ time. If people made incorrect predictions, this could result in an even greater burden on the economy.
Another said: “Individuals would realise that spending your income and not saving brought the largest reward from the state.”
RP also asked readers how else wealth could be redistributed in the UK. A third (33%) thought people should be educated on the importance of savings, 27% thought a flat rate of pension tax relief should be introduced and 19% suggested increasing taxes for the wealthiest (see chart 4, above).
One adviser said: “We have to generate employment and encourage savings. Currently, everything that is happening is saying to those under 40 that it is not worth saving because if you do the government will take it away – so spend for today.”
Another stated: “One could certainly increase taxes as well. I don’t think education can ever convert a spender into a saver – it is part of their basic nature.
“As long as we have a mixture of both types, and as long as the people who have spent rather than saved are not unduly favoured, the economy as a whole should be sufficiently balanced.”
The post Inquiry: Advisers slam plans to deny rich the state pension appeared first on Retirement Planner.