We need a sustainable pension settlement that is fair for hard working people and carers
I was delighted to hear the government has proposed through draft regulations to allow for 100% of any contributions made to an occupational or personal pension to be deducted from employed earnings when calculating entitlement to Universal Credit. This is something Stephen Timms and I, and other colleagues, have been arguing for while Ministers originally proposed only 50% of such contributions would be deducted.
The reduction from 100% to 50% reflects approximately £200m a year. But this needs to be set against the near £30bn saving from the acceleration of the increase in the state pension age to 66; and the £59bn from accelerating that increase up to 67 years. Those are very big numbers.
In the face of increasing life expectancy and the decline in pension saving in the private sector, the reform programme introduced by Labour and continued under the Coalition is intended to strike a new deal between the state, the citizen and the employer whereby:
• the state pension age rises and people need to work until later in life;
• the two-tiered state pension is increasingly flat rated to provide a fair and firm foundation for pension saving (in the Queen’s Speech, the government announced its intention to move more rapidly to a single tier flat rate); and
• private pension savings increase through a new employer duty requiring the automatic enrolment of workers into a workplace pension and a compulsory employer contribution.
These three elements are inseparably linked and intended to provide a pension settlement that is sustainable and fair for hard working people and carers. Although there is room for improvements in the detail of the deal, a broad political consensus has held. That detail is very important when ensuring an incentive to save for those on low and modest incomes.
The way in which pension contributions are treated under the tax/universal credit system is part of the incentive to save and the pay back on every £1 saved by low and modest income earners. It can provide them with an increase in the return by up to a third. The proposed regulations will allow those incentives to save will continue under Universal Credit.
Ministers previously argued that the 100% disregard of income paid into pension contributions was an area in which tax credits have been excessively generous. This sets aside the importance of the incentive to save, and indeed asserts that low earners are being over-incentivised. But that is not a great message to decent hardworking people who play by the rules.
Nor is this a message borne out by the facts. It ignores the around £10bn given in higher rate tax relief to pension savings by higher income earners. And the many other tax efficient ways of accumulating assets that they and their families can take advantage of.
Universal Credit is intended to encourage responsible behaviour. Policies to deliver an efficient benefit system and policies to incentivise pension saving by responsible people are not alternatives.
Baroness Jeannie Drake is a backbench Labour Peer in the House of Lords