Money Observer: Pension tax changes are likely to inflame intergenerational tension

Family argument.jpgAn inquiry into intergenerational fairness, conducted by the Department for Work and Pensions, found that those who are working today can expect retirement savings that are up to a third lower than the pensions enjoyed by current retirees.

The current generation of UK pensioners has benefited from free higher education, accelerating house prices, and final salary pensions – more than current generations can ever hope to receive.

The inequalities which already exist between today’s pensioners and younger workers may further be exacerbated by chancellor George Osborne’s forthcoming pension tax review, warns Hargreaves Lansdown.

‘Today’s pensioners have worked hard and are now enjoying the fruits of their labours; no one would seek to deny them that,’ says Tom McPhail, head of retirement policy.


‘However we are deeply concerned that the younger workers of today face an uphill battle to achieve the same levels of retirement prosperity.’

He adds: ‘Younger workers look with understandable envy at the generous guaranteed pensions enjoyed by many of today’s retirees.’ In contrast to today’s pensioners, those in their 20s, 30s and 40s face later retirement, lower contributions and fewer guarantees.

‘Any reduction to the support given by the government to pension savers risks inflaming intergeneration tension,’ says McPhail. ‘It is therefore imperative that the financial support given by the government to today’s younger workers is at least as generous as that enjoyed by their forebears.’

The average private pension wealth held by someone aged 60 is around £149,300. In contrast to that, a 40-year-old can expect an average private pension pot of just £112,000. Younger generations can expect retirement savings which are up to a third lower than the pensions enjoyed by today’s retirees.

Today’s pensioners have benefited from the tax system twice: first, when they were working in previous decades they received pension tax relief at rates around a quarter higher than today’s employees, and second, when paying a low basic rate of tax in retirement.

The average basic rate of pension tax relief between 1973 and 2014 was 26 per cent; for higher rate taxpayers it ranged between 40 per cent and 75 per cent. Meanwhile, most pensioners today are paying no more than 20 per cent income tax.


In separate research, Royal London warns that the March Budget would equal ‘daylight robbery’ if the chancellor replaces the current system with either a pension Isa or a low flat-rate of tax relief for all.

Introducing a so-called ‘pension Isa’, where contributions are made from taxed income but payouts after retirement are free of tax, would mean that today’s employees would pay tax on their pensions when they are paid, rather than once they retire.

‘This would, in effect, be the present government stealing funding from the next generation for the public services that they will need as our society ages,’ according to Royal London.

The Intergenerational Foundation, which contributed to the inquiry, argued that the intergenerational contract is under increasing strain from rising longevity and the growing wealth gap between Baby Boomers and the younger generation.

Due to the government’s austerity agenda, younger generations have suffered large falls in income, while the full range of pensioner benefits has been protected.


According to the Intergenerational Foundation, today’s pensioners have become the group within society with the lowest levels of poverty over the last 25 years.

However, not everyone in the older generation of pensioners is in an enviable position. While poverty among pensioners has been decreasing, a report by the Department for Work and Pensions from 2013/14 showed that 1.6 million pensioners live on low income.

According to evidence submitted to the inquiry by the South East region National Pensioners Convention, 7 per cent of over 65-year-olds in the UK said they went without essential items, such as electricity, in winter because they worried about the cost of heating.

Inequalities persist between generations, but also within the older generation of pensioners.

The year 2035 is estimated to be the tipping point when those aged 45 today will enter retirement and be less well off than earlier generations, according to Tisa’s ‘Our Financial Future’ report from 2014.

The generations who are impacted the most by expensive housing, less saving and less generous pensions are those aged 35 and younger, according to the report.

Among these generations low income levels in retirement are set to accelerate between 2045 and 2060, when another 12 million people are set to retire.

This article was originally published in Money Observer on 22 February 2016:

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