2015 Spending Review: what the Chancellor should say on pensions

24 November 2015

A Spending Review that fails to address the increasingly unsustainable pensions system cannot be deemed Comprehensive. The Chancellor should face the fiscal facts and act for future generations.

Firstly, he should scrap the triple lock. Uprating pensions by the higher of CPI inflation, average earnings or 2.5 per cent costs the taxpayer £6 billion more each year than an earnings link. The policy will increase government debt by 26 per cent of GDP over the next 50 years. It is right that the state pension protect pensioner earnings, but this can be achieved without crippling the Exchequer. Recently Reform argued for the replacing the triple lock with a relative earnings link, which could save £21 billion over the next five years.

Secondly, he should replace the Winter Fuel Allowance and free TV licences with a cash transfer for low-income pensioners. The Chancellor has indicated that he intends to mitigate the impact of his ill-conceived Tax Credit cuts – at £2.8 billion a year, the savings from means-testing these universal benefits could help him fund that.

The Chancellor’s review of pension tax relief has been delayed until March, but here is the final opportunity for reform. Moving to a more stable, flat-rate system would certainly be an improvement on the recent cycle of tinkering with the annual and lifetime allowances. The nuclear option of adopting a Taxed, Exempt, Exempt (TEE) approach – which would bring forward tens of billions of revenues – will no doubt be tempting for a Chancellor who still has a long way to go on deficit reduction. But he should resist. While there is limited evidence from overseas to indicate TEE strengthens the incentive to save, reform on this scale would create significant transaction costs, both for pension funds and the Treasury.

The challenges facing the Government are great; but the rewards of bold reform are greater. Developing and encouraging a secure and sustainable retirement for pensioners is achievable if the Government targets the state pension to those who need it. Encouraging individuals to save more by simplifying the system of tax relief will increase the wellbeing of those in retirement.

Alexander Hitchcock, Researcher, Reform

 

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