Pensions in crosshairs as govt looks for Covid debt solution

Pensions in crosshairs as govt looks for Covid debt solution

Scrapping the triple lock and introducing national insurance for pensioners could be on the to-do-list when the government assesses the role pensions can have in paying off Covid debt.

Advisers and industry spokespeople have predicted pensions will not remain unscathed when it comes to future tax hikes, with some claiming the older generation has benefitted for some time now and it is their turn to pay up.

Tom Selby, senior analyst at AJ Bell, said one way to do this would be by applying NI on retirement incomes, which are currently exempt.

Mr Selby said: “This would clearly bring in some much-needed cash, although there will be a difficult trade-off between boosting the coffers of the exchequer and risking taxing off the UK’s economic recovery if people reduce spending.

“It would also risk alienating older voters, who remain arguably the key demographic when it comes to winning power at the ballot box.”

Furthermore, he said it could have political implications, leaving the Conservatives fending off accusations they had broken their manifesto commitment not to raise income tax or NI.

But Mr Selby added: “There is an argument to say that, with older people more likely to rely on both the NHS and the long-term care system, at some point their NI exemption will at the very least need to be reviewed.”

Alan Chan, director and chartered financial planner at IFS Wealth & Pensions, also suggested NI should be levied on pensioners, especially as it pays for particular benefits enjoyed by the older generation, such as the state pension.

Mr Chan said: “It would be unfair if the younger generations were to pay higher tax rates while the triple lock guarantee remains unchanged, because the state pension is unfunded and it is wholly dependent on the younger generations to pay for it.

“Everyone will need to pay their fair share, one way or another, in order for the UK economy to return quicker and stronger.

“One fair way to raise extra revenue from pensions would be to scrap the triple lock guarantee on state pension and just have

Retail Price Index or Consumer Price Index protection instead, which is in line with many defined benefit pension schemes.

“The government could also reduce higher rate and additional rate tax relief on pension contributions, marginally increase NI rates for all workers, and introduce a new, lower rate of NI contributions for pensioners.”

Triple lock must go

Under current rules, the state pension is increased by the triple lock, which is the highest of earnings growth, price inflation or 2.5 per cent a year.

In its manifesto, the Conservative Party vowed to stick to the pension triple lock promise but the government has since been advised to use this option to pay off some of its coronavirus debts.

There are also concerns an expected jump in wages could see the state pension become unaffordable, especially when the government is dealing with mounting debt.