John Healey is on the verge of making pensioners pay for doing exactly what politicians have urged them to do for decades. Save for retirement.
John Healey will put people off saving if his new plan goes through (Image: Getty)
Next April, the full new state pension is expected to jump 3.9% to £13,036 a year, under the triple lock. It means that for the first time, the state pension will climb above the personal allowance, which has been frozen at £12,570 all the way to 2031. Someone getting the full new state pension will exceed that by £466, and face an automatic £93 income tax bill. Reeves promised to protect them, but was fired before confirming the details. Now Healey has hit on a solution. He’s reportedly preparing to raise the tax-free personal allowance to match the state pension at £13,036. But only for pensioners with no other income sources whatsoever.
Around one million pensioners could benefit. But the proposed fix risks sending a dreadful message to millions who have saved for retirement. Because anybody who gets even a single penny of income from another source, such as a small private pension, taxable savings or part-time earnings, won’t benefit from his exemption. Their personal allowance will remain frozen at £12,570. So they will pay tax on any state pension above that level, and on their other income too. But someone who never saved is rewarded with a higher £13,036 allowance. This is madness. Why bother putting money aside if the reward is to fall foul of a two-tier system?
Pensions firm Standard Life said Healey’s exemption could save those purely on the state pension a mighty £770 a year, if it is still in place by 2031. That’s a major benefit. But it is reserved for pensioners who never saved, or who did save but then spent the lot. Someone who has put aside money for their final years, even a tiny bit of pension, will lose all that. They could get round that by blowing their retirement savings, presumably, but that’s the lost thing we want pensioners to do. It’s an absolute disaster in the making.
Kate Smith, head of pensions at Aegon, warns that favouring people who have not built up additional retirement savings risks making those who have done the right thing and tucked money away feel punished for their efforts.
Tom Selby of AJ Bell said Healey risks creating “a mess of complexity, odd incentives and obvious unfairness in the tax system” “If the proposal means people who only have state pension income benefit while those who have saved privately don’t, those who have saved could understandably argue their diligent behaviour has effectively been punished.”
Former pensions minister Ros Altmann fears the plans could create an age penalty, too. Younger pensioners receiving the new state pension could escape tax on £13,036, while older pensioners on the basic state pension who get less than that amount may pay tax on it.
The basic state pension will be worth roughly £9,990 next year. That’s well below the proposed new £13,036 personal allowance. But many will also get extra payments through the State Second Pension or Serps, which are taxable.
Altmann said this could mean they pay tax while some under-75s on the new state pension will be tax exempt, despite having a similar or higher income. “This would create serious inequity in the tax system,” she said. Many basic state pensioners already feel hard done by and this would only make them feel more aggrieved.
The longer the £12,570 threshold remains frozen for some, the wider the gap between the state pension and the tax-free allowance will become, and the greater the sense of anger. This doesn’t bode well for Andy Burnham, who has already angered pensioners by threatening to axe the triple lock.
What a total mess. It’s already hard enough to persuade people to save for retirement. A system that makes pensioners suffer for setting money aside will only make it harder. Why bother if their reward is this clumsy tax botch? That’s the question millions will be asking themselves if Healey pushes this through in Wednesday’s Budget.