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Snatching state pensions back from the rich would end in disaster

28 April 2017

8:27 AM

28 April 2017

8:27 AM

While Theresa May makes her mind up over the triple lock on state pensions the OECD has come up with an altogether more radical suggestion: that the state pension be withdrawn entirely from the richest five to 10 per cent of the population, in order that more money be available for the poor. I am not sure that the purpose of the OECD ought to be to try to micromanage the fiscal policies of member states, but let’s treat it seriously nonetheless. Snatching the pensions of the better-off would be disastrous policy which, by destroying the disincentive to save, would achieve nothing other than to boost the numbers of poor people requiring assistance.

The state pension – which is worth £8297 per year to anyone retiring from now on – might seem a pittance compared with the income of the very rich. But in an era of low returns you need a hefty lump sum in order to generate an income of this level. Assuming an annual return of 3 per cent on your investments – which is what you might expect to derive in dividends from a basket of shares or in net rental income from a buy to let property, and far more than you will receive in a savings account – you would need a lump sum of £276,000 to earn yourself an income equivalent to the state pension. The wealthiest 10 per cent of households, according to the Office of National Statistics, do have savings and investments in excess of this, but not so much that they wouldn’t miss the state pension.   

Households at the 90th percentile of house wealth, reckons the ONS, have net wealth of £1.048 million. Exclude their housing wealth, which is tied up in properties in which they need to live, and they have pension pots worth £749,000. You might be in the wealthiest 10 per cent of households, in other words, and yet only have enough resources to derive an income (assuming a three per cent return again) of just under £22,500. That doesn’t make you rich even in Jeremy Corbyn’s mind. For people on this sort of income the state pension is an extremely useful boost to private or occupational pensions.

Worse is what effect it would have on saving to end universal entitlement to the state pension. Who would want to save throughout their working lives, thus reducing their standard of living, if they would be rewarded by having their state pension entitlement taken from them? Saving for the long-term future does not come naturally to many people. It has to be encouraged. The OECD’s proposal would do the exact opposite.       


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