Willetts: Tax pensioners more to stem potential opt-out rise

David Willetts, a former government minister and executive chair of the Resolution Foundation, said any dramatic rise in younger savers forgoing pension contributions would be a further sign of the pressures brought about by intergenerational inequality in the UK.

Auto-enrolment has so far seen high levels of participation from younger savers, but from April 2019 employees will begin to pay a minimum 5 per cent of pensionable salary, a much greater share of their disposable income. The effect of these rises is as yet unknown.

The financial pressures we face are overall pressures to pay for the services the older generation needs

David Willetts, Resolution Foundation

If the increases are met by opt-outs, said Willetts, “it seems to me that we have to improve the incentives… make the deal more attractive”.

He said: “You would have to fund that somehow,” suggesting that ministers “put some NICs on people’s receipt of occupational pensions”.

Speaking at a Barnett Waddingham conference on Wednesday, Willetts sought to dispel myths that younger generations are spendthrifts, and argued that the main driver for increased public spending in the future will be health and care costs as the large ‘baby boomer’ generation retires.

“We have ended up with, so far at least, pretty fantastic opportunities; we have built up housing wealth, we have built up pension wealth, and it’s very hard to see how our kids are going to have the same,” he said.

Salami slicing misses point

Speculation has been rife that chancellor of the exchequer Philip Hammond is planning further changes to the tax relief available on pension contributions.

But Willetts said it would be unfair to ask working people to fund pensioner benefits, especially when the median pensioner income has now surpassed the median working age income.

“The financial pressures we face are overall pressures to pay for the services the older generation needs,” he said. “Are we absolutely sure the right way to go forward is to put more tax on our kids?”

Of course, not all baby boomers are well off. Those without generous defined benefit packages may be.

“We’re kidding ourselves sometimes that there is this generation that has it all,” said group director of pensions at Walgreens Boots Alliance Julie Richards, pointing to the example of deprived former industrial towns as evidence that “you have to think about this very carefully before we draw too many conclusions about intergenerational cross-subsidy”.

Plans politically unworkable

Willetts has stressed that pensioner taxes would only be levied on the wealthiest, but for many the thought of imposing fresh taxation on a retired generation who are unable to plan proves politically unappetising.

“They have accrued something which they believe they are going to get... it seems to me a very unfair way, to retrospectively tax those people to enhance the benefits of others,” said Mark Futcher, Barnett Waddingham’s head of workplace wealth.

Instead, Futcher said he would support the use of a flat rate of tax relief on pension contributions, in order that help for those struggling to save is funded by wealthier savers, who still have time to plan for retirement.

“That’s a much more palatable model, and almost something that the majority of higher-rate taxpayers have resigned themselves to,” he said.