Should pensioners be taxed more to help the young?

Workers above the state pension age should be subject to national insurance contributions, according to a respected think tank. 

The radical proposal, from The Resolution Foundation, is the latest ‘blue-sky’ idea to solve the wealth inequality puzzle. The Resolution Foundation has also called on national insurance contributions to be levied on pension incomes, but at a lower rate of 6 per cent. Such moves would raise £2.3 billion, which the think tank says should be handed to the NHS. 

‘To maintain the NHS that the baby boomers were born into as they start to rely more heavily on it, we recommend a £2.3 billion “NHS levy” via National Insurance on the earnings of those above state pension age, and limited National Insurance on occupational pension income,’ it says. 

‘As well as raising funds for health services across the UK from better-of members of the group most likely to use them – four-fifths of revenues are drawn from the richest fifth of pensioners – this approach addresses inequities in the current tax treatment of pensions. 

‘Changes to taxes are never easy and should never be made lightly, but properly funding the NHS and our social care system in the coming decades is essential if we want to deliver our welfare promise to older generations and reshape the intergenerational contract for the challenges of the 21st century.’  

In addition, as reported last month, the think tank has also suggested that every 25-year-old should be handed £10,000 as a one-off gift. Such a move will be funded through a ‘lifetime receipts tax’, which will replace inheritance tax. The lifetime receipts tax will tax individuals once they have received more than £125,000 in gifts or inheritance during their lifetime.   

The Resolution Foundation has also called for pension tax relief to be overhauled and replaced with a ‘flatter system’, set at 18 per cent for basic-rate taxpayers and 28 per cent for higher-rate payers. In addition, it has outlined proposals to limit tax-free lump sums drawn at retirement to £40,000.

The think tank also pledged its support for the state pension triple lock to replaced with a new ‘double lock’, which will see the state pension increases by average earnings or inflation, whatever is highest. Under the triple lock, first introduced in 2010 by the Conservative/Liberal Democrat coalition government, the state pension increases each year by the highest of three measures: inflation, the average earnings increase or 2.5 per cent. 

The most recent proposals have attracted criticism from pension commentators, including Ros Altmann, the former pensions minister. She says forcing working pensioner to pay national insurance is not a solution to the care funding crisis. 

‘This would replace one unfair system with a new unfair system. It is true that the current system is unsustainable, unfair and unfit for purpose and the UK must address the lack of resources currently earmarked for social care. But hitting just those pensioners who are still working is not a solution. It merely introduces new unfairnesses.’ 

She adds: ‘Only about one in ten pensioners continues working past state pension age and they are not all well off. Many older workers keep working because they do not have good pensions and are trying to make ends meet. It is wrong to see them as an answer to the care funding shortfall. Why should they be targeted to pay for other people's care while non-working pensioners, many of whom have generous (often taxpayer-funded) pensions, would pay nothing?’ 

In a similar vein Tom Selby, senior analyst at AJ Bell, does not expect the proposals to ever see the light of day. He adds: ‘There would be significant complexities to overcome in establishing a flat rate of pension tax relief, particularly in relation to defined benefit pensions. Furthermore, any move to cap tax-free cash would need to be fair to those who have already contributed to a pension based on the rules of the existing system. It is also critical that any attempts to address intergenerational fairness through the pension system do not inadvertently damage incentives to save in the UK.’ 

-The 10 most popular investment funds – April 2018

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