10 Jun 2013, 2:50pm
personal finance:
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  • I don’t often agree with Ed Balls, but on pensions he has a point

    The pugnacious Ed Balls delivered himself of the opinion that since the Government is boracic lint, the state pension should be included in Osborne’s cap on welfare spending. And it’s for the Torygraph all hot and bothered.

    Let’s first get one fallacy out of the way. The Grauniad and the Left in general are keen to lump the state pension under the title of benefits, in an attempt to bring it under the general benefits aegis, particularly as it’s the largest area of benefit spending. Take exhibit A, extracted from here

    Benefit spending graphic

    Yowza. Look at the BIG SCARY load of spending on PENSIONS, the BENEFIT SCROUNGERS – YOUR MOTHER!!!

    Not so flippin’ fast, benefistas. Unusually for benefits, to get the State Pension, in general you have to have been paying IN to the system, for 35 years as it will soon be. Unlike, say for housing benefit, which has been artifically inflating the price of housing in parts of Britain, which is the next biggest lump, for which you don’t have to have been paying in.

    So it is different. Something actually got lobbed into the pot. I’m not bright enough to be able to say whether it was anywhere near enough, but I do know that no NI contribution, no state pension. You get means tested pension credit then I believe, if you have no capital. Repeat after me, Guardianistas

    The State Pension is a contributory benefit, unlike nearly all other UK welfare payments

    It’s kind of in the title of the tax that was set up to pay for that and the NHS, though the difference was quickly diluted and chancellors hate allocated taxation. The title was National Insurance – insurance, geddit? In the years before the welfare state was set up, trades established friendly societies, which by taking a small amount from all members, could insure them against illness and death leaving their dependents destitute. Unlike the modern welfare state, however, the friendly societies did send the boys round in the event of a claim to establish whether there were grounds for it, at least according to the exhibit in the Somerset Rural Life museum I saw 😉

    Back to Ed Balls

    Having said that, he’s right to raise the issue. We have all gone on a mahoosive bender in the last 10-20 years, and Britain is nowhere near as rich as we believed we were. We will have to consume less, and material living standards will either fall, or rise more slowly than people have been used to. I’m actually on the optimistic side of the fence there, for the full Chicken Little treatment you can take a look Moneyweek’s The End of Britain and for a less breathless but equally dark prognostication Tullet Prebon’s Tim Morgan seems to be trying to scare potential investors shitless with Project Armageddon – might there be no way out for Britain, one for our American friends titled Armageddon USA with some marvellous depression-era iconography, and just in case you were looking for somewhere else to hide away from the Four Horsemen and the blowing of trumpets at the crack of Doom there’s Perfect Storm – energy, finance and the End of Growth. At least his boss, Terry Smith appears to have taken the hint, switched out the lights and is either building his safe room out of gold bricks while running Fundsmith, or having a quick laugh in the background while he builds his fund.

    Although there’s a case to be made that benefits that people have contributed to should be eroded less quickly than those that aren’t, the Tory triple lock is a brazen vote-winning approach that should be challenged, if only to have the debate. It’s one of the reasons I suspect there won’t be a State Pension by the time I am 67. It’s also, incidentally, one of the reasons that makes retiring and drawing my pension earlier more attractive. I can draw my company pension before 55. One of the key advantages in drawing one’s pension early is that it reduces the income that HMRC will taxes me on, as well as reducing my total income (because it’s paid out for longer). The latter effect is counteracted somewhat by the 25% tax-free pension commencement lump sum. In most people’s cases at The Firm that would reduce their pension, which would be nuts. However, I spotted that one could save this amount ahead of time in AVCs, and thereby avoid paying 40% tax on 1/4 of the total pension amount. This is then eroded by 10% due the the nasty tendency of cash to quietly die in the night, and I will move it into ISAs over the years once I draw my pension. Taxation will probably rise in the coming years, which is why I have emphasised ISAs as part of the mix, because I don’t want to be a tall poppy to that future government.

    But change is coming, because things that can’t carry on usualy have a habit of not carrying on, and Red Ed (2) has done us all a favour in calling it out. I admire him for his honesty (relevant section starts at about 11 mins in)

     

    This loss of living standards is going to be nowhere near as bad as it’s being made out to be, for people who are adaptable enough to rein in their consumer spending. Indeed, if the people who currently do their consumer spending on credit cards could only knock it off for long enough to pay their debts off, they could buy 20% more consumer tat at average credit card interest rates without paying any more – simply by saving up first! If I look back at the Britain I grew up into, Britain is massively richer now in nearly all respects, bar two.

    One is I would hate to be a child in modern Britain. The children I went to school with nearly all lived with both natural parents, and individual freedom in Britain  seems to have been bought at the cost of some societal cohesiveness. It was probably always tough at the low end, but now it seems tough everywhere. However, children have proven to be adaptable and resilient through the rest of history so it will probably come out okay in the wash.

    The other is related – as a child in the 1960s and even 70s  the world was a more hopeful place, technology was going to make things better, the grainy moon landings in 1969 I watched were going to be the precursors of shiny spacecraft going to colonise other plants, with Flash Gordon sort of fins. It didn’t happen – we gave up going to the Moon in the oil shock of the 1970s, and we are now scared that global warming is going to kill us all, and generally tomorrow is going to look like a worse place than today. I am glad that I had a childhood where the adults believed that things could only get better – even if they were wrong…

    Everywhere else, as far as I can see, we are so much better off. Our cars are cheaper in real terms ,they’re more reliable, we have an endless array of gadgets and nick-nacks to occupy ourselves with, communications are cheaper, far richer ,more extensive and faster. Travel is more widespread – I was 35 when I first boarded an aircraft, which probably sounds ridiculous to someone under 35 now 😉 Our homes are heated properly, we have a bewildering choice of entertainment. Healthcare is much better.

    So while Ed Balls is promising less for everyone, I do agree he is right in saying you should look across the whole welfare state, even if I don’t agree with him that contributory welfare are equivalent to non-contributory ones. In return for his inclusion of the State Pension to the welfare spending cap, I would like to see

    • child benefit restricted to no more than two children and no household with > £50k income (to address the shocking keening noise and the unfairness screamers)
    • the winter fuel allowance, bus passes and free TV licence iced from people with more than the average UK household income
    • and for unemployment benefit to have a large contributory component – like in many European countries

    however, since I’m not running for office it doesn’t matter much what I think. However, if National Insurance goes back to its roots and starts to look a lot more like insurance I’m for it.

     
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