Why does the coalition keep on targeting our pensioners?

By Dr Ros Altmann , Thursday 12 April 2012

What on earth is the Government thinking? Surely it cannot be true that they are serious about taxing state pensions at source? I hope to hear a rapid rebuttal with the Chancellor telling us he has decided to reject this idea straightaway
ParliamentPensioners could face their state pension being taxed at source

If we do not hear strong denials the Cabinet will continue to appear as terribly out of touch. Penalising older people who need protection is not the mark of a caring Government. If retired people are due to pay tax on pensions (though around half of them probably have incomes too low to be taxpayers) then trust them to pay it, don’t confiscate it from everyone – including those who should not be taxed.

A report from the Public Accounts Committee in 2010 concluded that older people “are more likely to comply with their tax obligations than other taxpayers but are less likely to understand them and many pay more tax than they need to”.

In addition the committee said that HMRC’s computer system failings contributed to an estimated 1.5 million pensioners paying £250 million extra tax on private pensions and around 2.4 million pensioners have also overpaid around £200 million in tax because they had it deducted from savings income at source. This has led to calls for improvements in the Government’s systems that will help pensioners pay the right amount but that does not mean imposing extra tax burdens on poor pensioners.

I just cannot believe that the Government could really be serious about deducting tax at source from state pensions. But we have not yet heard any denials, which is very worrying. It is surely inconceivable that the Government really would impose tax on the state pensions for all.

If a pensioners’ only income is the state amount of £107.45 a week they will not be liable for tax anyway. But those with small private pensions might only receive £85-96 a week with a 20 per cent tax deduction at source. Taxing state pensions like this would be profoundly wrong and could cause untold misery.

The Office for Tax Simplification has suggested that, because there are problems in assessing pensioners’ correct tax, the Government could resolve the situation by taxing pension payments at source through the PAYE system and then making pensioners reclaim any tax overpaid. This could ensure more tax is paid of course but it would also force many pensioners – the poorest ones – to have to fill in forms and check that their money was correct. That is a recipe for disaster.

How out of touch can policymakers be? The experts at the Office for Tax Simplification merely comment that deducting tax at source could cause some “cash flow” problems, though once any overpayments are corrected pensioners would not lose out. This argument beggars belief. “Cash flow” problems for pensioners who need every penny just to meet the costs of everyday living could mean pensioners being unable to afford basic necessities.

Many struggle to manage their spending each and every week. Waiting to reclaim tax after the end of a tax year may be fine for the well-off but would leave poorer pensioners at risk. And of course some will not survive to the end of the tax year.

Currently the system is that state pensions are paid in full, while private pensions generally have tax deducted at source. That system does sometimes go wrong because HMRC’s records do not match up with those of private providers but the answer to such problems is to ensure better liaison and get the records straight, not penalise all pensioners. If the authorities cannot get their figures right then find a better way to operate, don’t disrupt decent people’s lives.

Ironically the Chancellor has also just announced that he would like to track down the very wealthy tax-avoiders who pay far too little tax. This may provide a useful distraction from plans to penalise pensioners again but they will not be fobbed off easily.

The state pension should be assumed to be retired people’s base level of pension and should really be tax-free. Taxing it at source will mean many paying too much money by default and would be a windfall for the Treasury but at the expense of many of the most vulnerable in society. They will fail to fill in the right forms, they will be confused, they will be worried about where their money will come from.

Official reports consistently show that pensioners do not understand how to work out tax codings and those in retirement cannot afford accountants to help them, nor should they need to. Simplification must not mean more penalising of pensioners.

In the Budget the Chancellor claimed he was abolishing the age-related allowances to help pensioners who were struggling to fill in complex tax forms and to simplify the tax system. This hit those who had saved to provide themselves with more than just the state pension and means they will be worse off in future.

That caused uproar and affected around four million middle income pensioners but taxing state pensions at source could cause even greater anger. It would be a recipe for more pensioner penury and this idea must be squashed straightaway.

Pensioners have had enough – it’s time policy-makers treated them with the dignity and respect they deserve. State pensions should be tax free – now that would be proper simplification.


The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

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Why does the coalition keep on targeting our pensioners?

What on earth is the Government thinking? Surely it cannot be true that they are serious about taxing state pensions at source? I hope to hear a rapid rebuttal with the Chancellor telling us he has decided to reject this idea straightaway

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