Ministers are refusing to write to people to tell them how much they will lose under the new state pension over “spurious” claims that sending out such letters would breach data protection laws.
Currently, detailed state pension estimates are available upon request, but at a meeting in Parliament on Monday, the Department for Work and Pensions (DWP) admitted that when it sent out letters to 6,000 people inviting them to apply for one, 79 responded.
Despite fears that millions of people approaching retirement still do not know how the reforms will impact their retirement incomes, Baroness Ros Altmann, the Pensions Minister, said it would not be possible to send out a statement to everybody.
At least 16 million young people worse off under new state pension
Experts accused the DWP of trying to “conceal bad news” by not sending out letters, while Frank Field, the Labour MP and chairman of the Work and Pensions select committee queried the data protection claims. He pointed out that the taxman and other government departments routinely send out letters chasing debts.
The Work and Pensions select committee is investigating claims that baby boomers get more out of the state than they put in while younger generations lose out
Baroness Altmann also blamed the cost to taxpayers for not sending out letters on masse, while it was also claimed that the letters might pose a potential fraud risk for thousands of people, as roughly 3pc could be expected to “go missing”.
Last week, the DWP released figures revealing that at least 16?million people under the age of 43 will be worse off as a result of the new “flat rate” state pension.
Women ‘short-changed and shafted’ by state pension age changes
It confirmed that 53pc of 43-year-olds will receive a lower state pension under the new arrangements when they reach state pension age in 2040. They will receive £572 a year less or £17,160 over the course of a 30-year-retirement, than they would have done under the current system.
From April, people reaching state pension age will receive a “flat rate” worth £155.65 a week, instead of the current basic pension worth £119.30, which has additional elements. Most people will not receive the headline amounts, but will receive more or less depending on their employment circumstances.
How to get the best possible pension in 2016
Tom McPhail, Head of Pensions Policy at Hargreaves Lansdown, an investment specialist, said the DWP’s excuses were spurious. He described the Government’s refusal to send out letters as “part cock up, part conspiracy.” He said: “Some of the DWP’s systems were built in the 1970s and make effective communications very difficult. But there is also a deliberate effort from the department to spin the good news relating to the state pension, and conceal the bad news.”
The Chancellor faces a stark choice in the coming months, with the outcome of a Government review of the pension tax system likely to have a dramatic impact on both public finances and attitudes toward long-term savings.
Under today’s system, individuals are exempt from paying tax on anything they invest into a pension. Instead, pension income is taxed in retirement, creating a deferral that sees the Government forgo income tax until individuals start spending their retirement savings.
This system is often referred to as “exempt-exempt-taxed” (abbreviated to EET), with contributions and investment growth exempt from tax, while withdrawals are subject to income tax.
“Even with the increase in State Pension Age (SPA), it is expected that by 2037 there will only be 2.7 people of working age for every person over SPA. The figure is currently around 3.2 people.”
HM Treasury insists the review currently being conducted may not result in any major changes to the current system. But the consensus view is that we are set for an overhaul nonetheless.
Government have suggested moving away from the EET system in favour of a taxed-exempt-exempt approach (TEE). Under such a system, pension contributions would be paid in after income tax but with no tax on growth or withdrawals.
The tax trap that’s catching home workers
Individual Savings Accounts (ISAS) function this way, and some have suggested a ‘pension-Isa’ – a single account, with buckets for pre and post retirement savings, would make pensions simpler to understand.
Crucially, however, it would also break the tax deferral that currently exists, allowing Government to benefit from income tax on pension contributions upfront, without waiting until individuals reach retirement.
The net cost to the Exchequer from pensions tax relief in 2013-14 was £21.2bn. Bringing tax receipts forward would create a net tax gain for the Government since more income tax would be taken during savers’ working lives, when for many their rate of income tax will be greater (the majority of retirees pay no more than the basic rate of income tax).
To introduce this system would be a catastrophic mistake for the country and future generations of savers, however.
While it would provide a sticking-plaster for the current fiscal deficit, the gamble with tomorrow’s public finances is enormous. It would require successive Governments of whatever political hue to defer expenditure, holding back tax receipts in the short-term to fund the future costs of an ageing society.
The problem is compounded by future demographic changes. ONS figures show a marked increase in the estimate of the old age dependency ratio due to growing numbers of elderly people.
Even with the increase in state pension age (SPA), it is expected that by 2037 there will only be 2.7 people of working age for every person over SPA. The figure is currently around 3.2 people.
This will also have an impact on key public services like the NHS, where average spending for retired households is nearly double that for non-retired households.
“Worse still, without the incentive of tax-relief on contributions, those that fear the Government may renege on the promise of tax-free growth and withdrawals may elect not to save into a pension at all. ”
With a greater proportion of the future retired population potentially paying no tax on their income, it will increasingly be down to the generations in work to provide funding for government spending.
While it is inevitable that tax receipts from working-age households must subsidise those in retirement, removing the tax deferral in-built in the TEE system will place huge responsibility on Government to ensure they provide for the future.
Hidden fees double the cost of pensions, report shows
It is not difficult to foresee a scenario in which the contributions of a proportionally smaller workforce struggles to keep up with the state pension provision and other public expenditure while an aging population pays no tax on its retirement income. The full effect might be more than 30 or 40 years away, but we can see a perfect storm brewing.
In addition to the risk of managing a tax take that will plateau and then fall in value terms, moving to a TEE system threatens consumer confidence in long-term saving. TEE asks voters to place a huge amount of trust in future governments not to retrospectively apply tax on withdrawals (a ‘TET’ approach) during hard-times.
Pensions have historically been an easy target for quick wins to generate tax revenue and a parliamentary session or budget hardly passes without further tinkering of the pension tax system. The track record thus gives people little reason to believe policymakers will keep to their side of the deal 20 or 25 years down the line, and the temptation for savers would be to remove savings from pensions at the earliest opportunity in order to avoid a snap-tax on pension income.
This would be a disaster for personal savings in the UK, significantly reducing the options available to individuals to secure a sustainable income in retirement.
