What's behind the Lib Dems' plans to tax universal benefits for pensioners?

26 April 2013

If a report in yesterday's Independent is to be believed, the Lib Dems are considering putting forward plans to tax the benefits received by better-off pensioners, a proposal that might be discussed ahead of the Government's spending review.

Two possibilities are discussed by the Independent: under the first proposal, winter fuel payments and TV licences would be 'taxed', which the Business Secretary Vince Cable suggested in an interview with the Express might see the 1.5 million wealthiest pensioners losing "either £80 or £120 a year from the allowance". This, the Independent estimates, could save the Government £250 million per year.

Another option reportedly under consideration by the Lib Dems is to withdraw "freebies" from all pensioners save those who qualify for the means-tested Pension Credit top-up, which the paper estimates would save the Government £1.4 billion a year.

Where have these estimates come from?

"Lib Dem ministers" are said to be behind these plans but the article keeps them anonymous, and the proposals don't yet appear to be official party policy.

We got in touch with both the Government and the Liberal Democrats to ask for more information.

A Lib Dem spokesperson said they didn't know who the source behind the Independent's story was, and while they were aware that the idea was being floated aroud, there's no timetable for it to be officially discussed. They confirmed the plans will not be featured in the Government's Spending Review.

This was also confirmed by the DWP press office, who added that universal benefits are protected by the Coalition Agreement

Universal benefits: what are the facts?

So what are the concrete details of the plans? Here's what we do know.

As it currently stands, 12.8 million people receive a state pension, and all of them are eligible for concessionary bus travel, a Winter Fuel Payment, a £10 Christmas bonus, free prescriptions and sight tests, and free TV licences for people aged 75 or over.

Winter Fuel Payments alone are worth around £200 a year, or £300 for those aged over 80. In 2012/13, they are expected to cost the Government some £2.2 billion according to a House of Commons Library report, whereas free bus travel is estimated at just under £1.1 billion, and free TV licences for the over 75s at around £578 million.

Who did the maths?

While Lib Dem HQ hasn't yet been able to provide us a source for their estimated savings, they do tally with other estimates that we've seen. The Institute for Fiscal Studies (IFS) made the exact same calculations in a report on pensioners and the tax and benefit system published last year.

Here's what the report says:

"Restricting Winter Fuel Payment and free TV licences to those on Pension Credit would save around £1.4 billion a year. Another option would be to tax these payments: again, only higher-income pensioners would lose out from this, as many pensioners' incomes are less than the income tax threshold. This would raise much less, at only around £250 million per year — those pensioners who do pay tax would only lose 20% of the value of these payments if they were basic-rate taxpayers (though the small number of pensioners who are higher- and additional rate taxpayers would lose more)."

While the Liberal Democrats didn't cite a source for the estimates mentioned in the Independent, the evidence suggests the figures are soundly sourced. As we have mentioned in the past, critics have highlighted the potential high costs of means testing and taxing universal benefits, so we'll have to wait for an official policy to see whether they will amount to the estimates cited above. 


Flickr image courtesy of Tax Credits

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