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.

    Hi Ermine, good article, but don’t panic, Yet.

    State Pension is not a benefit, this was tested back in the early 90’s shortly after Mr Blair and Brown came to power.

    The first thing he tried to do was to means test the State Pension,[SP] by the proposal to deduct £ for £ for every £ your Company Pension exceeded the State Pension.

    It was pointed out to Mr Brown, that the SP was a contract in Law. You pay 44 years if Male or 38 if Female and in return you got 1/44 or 1/38 of whatever the SP was at the time. if you paid less the 44 years contributions your SP was paid pro-rata.

    Mr Brown, declined to accept the challenge of taking it to court. At the time he would lose, both the case and have to pay costs.

    What did happen was;
    a] he linked Company Pensions [CP] with other benefits.
    eg. for every £ your CP was above Sick Pay or Unemployment Benefit [UB] a £ was deducted. Even though you may have paid sufficient NI contributions for that year. The only sop, he would give you credits for every week you signed on.
    b] hence as you are not in receipt of UB you could not sign up to any retraining courses or night school course that were free to everyone else,

    So the only things he could tinker with was,
    a] harmonising the SP for both Male & females.
    b] progressively raise retirement age for SP.
    c] for some reason he reduced the necessary min contributions to 30? I am not sure what he gained by that?

    All the Government can do is,
    a]freeze the level of SP at its current level.
    b]play around with the annual rise, RPI, CPI or wage inflation.
    c]play around with the minimum guaranteed income figure for pensioners, who don’t have a full SP.

    All us Pensioners can do is vote out of office whichever party try’s to play with
    a & b above. So the governments long-term plan is for us to leave this mortal coil.

    “[] and individual freedom in Britain seems to have been bought at the cost of some societal cohesiveness”

    Lost me ermine, which freedoms and what aspects of societal cohesiveness did you have in mind ?

    @Lupulco I for one am grateful for the shortening of qualifying period, I wouldn’t make 40 years 😉 However, what has been given can also be taken away. Or taxed, or the qualifying age raised, Taxation is, after all, a different take on means testing, albeit the means to pay…

    @Nathan It appears to me the stability I enjoyed as a child and most of my schoolmates and a view of a generally benign world seems a lot less now.

    However, there is a lot more personal freedom and opportunity for adventure in the adult world now than there was a few decades ago.

    10 Jun 2013, 11:15pm
    by Grumpy Old Paul

    reply

    Given this statement from the HMRC website:

    “You can also get National Insurance credits for any weeks when you’ve been claiming benefits such as:
    Carer’s Allowance
    Incapacity Benefit or Employment and Support Allowance
    Jobseeker’s Allowance”

    you can argue that the State Pension is not dependent on individual contributions!

    Is Ed Balls trying to commit electoral suicide? Did he have Ed Miliband’s permission?

    Like you, I’d much rather have had my (rented council flat) childhood in the 1950s and 1960s than today not just for the stable family environment and justified perception that things were getting better (all the time!). During that period, there was a real sense of optimism, a broadening of opportunities for education and travel, a relaxation of the hitherto stultifying conformity as well an improvement in material standards of living.

    We did live under the shadow of the Bomb and I and some of my old school chums still recall being very scared at the age of 12 during the Cuban missile crisis. However, employment prospects were massively better than today with people able to walk out of one job on a Friday and start another on the Monday.

    Children used to play out all day during the holidays free from fear although the dangers were probably there. An old chum of mine recalls being allowed to go on his own to see the Rolling Stones when he was 13.

    Like many of my contemporaries, I benefited from the expansion in university education, had three marvellous years away from home, meeting a vast range of people and gaining exposure to a world of ideas and culture far removed from my childhood milieu. Oh yes, with almost a full grant and no debt on graduation.

    Vacation jobs were easy to come by and often well-paid. I remember being told of some work being available at a beer bottling factory and advised to merely enquire at the security gate. I was ushered in, given a very cursory interview and started work the following week earning rather more than my father.

    On graduation, finding employment was not so easy but once at work and equipped with marketable skills, job security was not a concern, rapid salary increases were the order of the day and it was easy to move around the country to seek out interesting opportunities.

    Final salary pensions were the norm for white collar occupations.

    Oh, I haven’t mentioned mortgage servicing costs, on which we received tax relief, being rapidly eroded by inflation

    Don’t start me on the music of the 1960s…

    So yes, I feel very sorry for the youngsters of today. I suspect that some redistribution of wealth from the old to the young in the developed world is inevitable, if only to ameliorate social unrest. However, I don’t see a government being elected with such a policy in its manifesto. The grey vote is large, growing, turns out in force at elections and turkeys don’t vote for Christmas.

    @ GOP
    Given this statement from the HMRC website:

    “You can also get National Insurance credits for any weeks when you’ve been claiming benefits such as:
    Carer’s Allowance
    Incapacity Benefit or Employment and Support Allowance
    Jobseeker’s Allowance”

    you can argue that the State Pension is not dependent on individual contributions!

    I accept your argument, but Brown & Co were not prepared to test it court. The option of a legal ruling, be it UK or EU is still an option.
    The Government may change the Law, but it is still subject to both the Law and the Electorates will.
    Then again being subject to the electorates will maybe the reason we, [and not just the UK] are in the state that we are in?

    “Christmas is a time when kids tell Santa Claus what they want and adults pay for it. Deficits are when adults tell the government what they want—and their kids pay for it.”
    Richard D. Lamm (1935–), US politician
    Source: US News & World Report (1985)

    Things don’t change, we just have to make the best of it.

    12 Jun 2013, 2:34pm
    by Neverland

    reply

    Well I disagree

    Having read the original post and gone away and thought about it for a few days i think the idea that “pensions” are somehow different from any other benefit is false

    Its really just the same as saying that university education should be free because anyone could go if they got the grades – in fact mainly the posh kids went, paid for by everyone else

    In pensions life expectancy is key

    – in the less wealthy parts of the UK, expected average male life expectancy does not even get to the new state pension age of 68

    – go to leafy surrey or kensington however and its just well over 80

    State pensions are just another expensive subsidy going to the already richest segment of the population

    @ Neverland
    This as been the case since the State Pension was introduced by Lloyd George.
    You paid 5% of your income and you got a pension at 65. The only snag was most of the contributors did not reach 60.
    The Pay As You Go [PAYG] was the worlds biggest Ponzi Scheme.
    Unfortunately it is now pay back time, hence the need to raise retirement to 67 or maybe 70. To balance its books retirement as to be average life expectancy + 5 years

    Ermine, a Webb site that you might find interesting.

    http://crawlingroad.com/blog/2008/12/17/the-permanent-portfolio-and-the-16-golden-rules-of-financial-safety/

    13 Jun 2013, 12:28pm
    by Grumpy Old Paul

    reply

    @Neverland,

    I probably have more sympathy with your outlook than most but I think you slightly over-state your case.

    So far as pensions being not classified as a benefit is concerned, I regard that as being something of a theological debate. However, as I pointed out in my earlier post, someone who has never done a day’s work in their life could receive NI credits and qualify for a full State Pension.

    On free university education, when only a tiny minority of young people attended university, it could be justified that most graduates had enhanced earnings as a result of their education and would pay additional tax during the course of their working lives.
    Furthermore, because the numbers were small, even with the generous grant and free tuition fees, overall costs were low. These arguments no longer apply. My view is that the real problem is the over-expansion of tertiary education and the devaluation of the degree qualification as a consequence of the ‘nobody must fail’, ‘tick box’ culture. But that is a separate subject for debate.

    Your point about the rich benefiting most from pensions as a result of greater longevity is a valid one. They also benefit more from NHS services through their greater longevity and assertiveness. On the other hand, they will generally have paid more tax and NI than their poorer contemporaries and will often continue to pay more income tax in retirement. They also tend to pay more VAT and excise duties.

    I’m two years from becoming eligible for the State Pension, but, I hope, not as selfish as many of my contemporaries and elders. I regard the current system as ludicrous. The following changes would be fairer and cheaper to administrate but won’t be introduced for obvious reasons:

    a) Merge income tax and NI and make the tax system honest and fairer.

    b) Remove all special benefits such as winter fuel allowances and TV licences from pensioners. Remain to be persuaded about bus passes which are a lifeline for some people and probably not used that much by wealthier pensioners; they, like me, enjoy getting their Seniors’ discount on their 1st Class fares!

    c) Increase the personal tax allowance and basic State Pension using the monies released by a) and b)

    d) Impose a £10 fee for GP consultations which can be reclaimed to discourage unnecessary visits.

    e) Increase the top rate of tax to 75% for earnings in excess of £1 million. The point is not to raise significant amounts of income tax but to reduce inequality. There are a bunch of other benefits too.

    13 Jun 2013, 4:23pm
    by Neverland

    reply

    @GOP

    Re (e) tried in France, ruled illegal in the country that invented the guillotine…

    …all the french rich moved to belgium and the UK (or russia if you are a fat past it actor)

    @GOP I didn’t realise you accumulate NI from benefits

    @Neverland Take your point, particularly with the drfiting upward of the SP commencement, *I hadn’t really thought about that end of things 😉

    Mind you, I personally experienced the upside of the university entry. I’d never have taken on the debts students incur now, so I am all for more difficult entry exams so fewer students can be supported properly. The 50% target for university entry implies university is for people of average brightness and up, which hasn’t been the historical expectation.

    @Lupulco I really liked rule#3 on the difference between investing and speculating, but all of those are good!

    The Harry Browne story of it getting harder to earn money with increasing regulation squares with my experience of a working life, except at the very start. I paid 30% tax when I started work, even on a crummy wage

    @GOP some of those are already a feature of European welfare systems – the charge for seeing a doctor aligns with French and I believe German practice and seems to work well there!

    Fantastic article, I actually learnt a lot, especially the fact that you do accumulate NI from benefits. Couldn’t believe it to be honest.

     

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