The cost of the welfare state - challenges posed and solutions

[Bletchleyite]

To an extent, I agree with the principle. But because of the scenario @Merle Haggard describes, with pretty much all private pension drawdown after 66 being taxable on the way out, the benefit of tax relief on the way in is effectively lost (there will be some weird edge cases where people have large private pensions but much less than the full state pension but they really will be unusual cases). At that point, you might as well stick it in an ISA instead, then you don't have to wait until the government tells you you're old enough to draw it down. The main private pension advantage is reduced to plugging the gap between private pension and state pension age for those wanting to retire earlier than the state pension age.

Though an upside of a pension, if you're not very financially disciplined, is that you can't wreck your retirement by sneaking a bit of money out of it to spend now. Some people do need those controls, it's not purely about the tax relief.

 

[styles]

Though an upside of a pension, if you're not very financially disciplined, is that you can't wreck your retirement by sneaking a bit of money out of it to spend now. Some people do need those controls, it's not purely about the tax relief.

This is true. Same also with student loan repayments being automatically deducted from people's pay packets. It's money you can't touch.

 

[Merle Haggard]

To an extent, I agree with the principle. But because of the scenario @Merle Haggard describes, with pretty much all private pension drawdown after 66 being taxable on the way out, the benefit of tax relief on the way in is effectively lost (there will be some weird edge cases where people have large private pensions but much less than the full state pension but they really will be unusual cases). At that point, you might as well stick it in an ISA instead, then you don't have to wait until the government tells you you're old enough to draw it down. The main private pension advantage is reduced to plugging the gap between private pension and state pension age for those wanting to retire earlier than the state pension age.

Indeed; and I believe Chancellor Brown made changes to taxation of investment by Pension Funds resulting in, it seems to me, double taxation - taxation on my pension 'pot' investment (dividends) and taxation of the same capital when I receive it as pension.

Though an upside of a pension, if you're not very financially disciplined, is that you can't wreck your retirement by sneaking a bit of money out of it to spend now. Some people do need those controls, it's not purely about the tax relief.

That's a fair point; I had no option but to join the Railway Pension Fund when I started work on the railway but, had I had the choice, I would probably have opted to keep all of my salary rather than lose 7 1/2% (level then) of it to something in the distant future.
As will be evident from the ageist remarks on this thread, no one young thinks that they'll ever get old. Fortunately, I have - much better than the only other alternative

 

[Dave61]

So much of the welfare state bill will be reduced if we build more social housing. A huge part of the problem is we sold a lot of the housing stock off with the idea of letting tenants buy the house they have lived in for years. When those tenants die or sell up the houses often end up in private landlords. These houses are often then rented out to people who need to claim housing benefits for their rent and it becomes a vicious circle.

Then there is the issue of entry level jobs, these are becoming harder and harder to find which means a huge amount of young people become unemployed. If we stop giving benefits to these people then crime will increase. We can't talk about cutting the benefits bill while not acknowledge the severe lack of jobs which will only get worse with AI.

Also having an economy where a large number of jobs are based in Minimum wage (and would be lower if the employers could get away with it) getting out of the "benefits trap" is quite hard. A side effect of that being that as wages are so low the taxes they pay are minimal (although the personal allowance financial drag is catching up with that).

== Doublepost prevention - post automatically merged: 18 Aug 2026 ==

The State Pension is taxable in that it is treated as income, however it is treated as the first source of income. Because it is only just short of the Personal Allowance it means that any other pension, or PAYE work, is taxed at 25% on almost all of the payment. Is this a unique feature of the SP or are all benefits (for instance the Child one I mentioned above) also taking into account when taxed? If one's only income is benefits and the total exceeds the Personal Allowance, are they similarly taxed?

One penalty against private pensions already exists. One of my - unfortunately now late - friends had a small private pension (from a bus operator) that pushed his income just above PA. The increase in the private one each year was swallowed up by extra taxation because of the freezing of the PA, although of course he did receive an increase in his SP..

The government are going to have to do something before next year otherwise the SP will end up above the Personal Allowance, my financial advisor thinks what will happen is that they will make it so that people *just* on the SP won't have to pay any tax but woe betide anyone who has any other taxable income as that will well and truly get hammered. Will suit my wife just fine but I am going to feel the pain.

 

[Bald Rick]

Indeed; and I believe Chancellor Brown made changes to taxation of investment by Pension Funds resulting in, it seems to me, double taxation - taxation on my pension 'pot' investment (dividends) and taxation of the same capital when I receive it as pension.

You believe wrong.

Broadly speaking no tax is paid on any contributions into a recognised pension scheme (assuming you are not earning over £200k), and there is no tax paid on any returns within your pension investments in the pension scheme.

There is income tax (but not NI) payable on pension income when you receive it at your marginal rate, although you can receive up to 25% of it free of tax as a lump sum, up to £268,275.

If you think otherwise, I’d be interested to understand why.

 

[Merle Haggard]

You believe wrong.

Broadly speaking no tax is paid on any contribitions into a recognised pension scheme (assuming you are not earning over £200k), and there is no tax paid on any returns within your pension investments.

There is income tax (but not NI) payable on pension income when you receive it at your marginal rate, although you can receive up to 25% of it free of tax as a lump sum, uo the around £268,275.

If you think otherwise, I’d be interested to understand why.

What I was thinking of was that, in his July 1997 Budget, Chancellor Gordon Brown abolished tax credits on company dividends received by pension funds.

I accept that abolishing tax credits is not the same as increasing taxes.

 

[styles]

You believe wrong.

Broadly speaking no tax is paid on any contribitions into a recognised pension scheme (assuming you are not earning over £200k), and there is no tax paid on any returns within your pension investments.

There is income tax (but not NI) payable on pension income when you receive it at your marginal rate, although you can receive up to 25% of it free of tax as a lump sum, uo the around £268,275.

If you think otherwise, I’d be interested to understand why.

Also worth pointing out - potentially 40% on the way out if you die and your estate is above the inheritance tax thresholds. Ordinarily I'd say not many basic rate taxpayers would find themselves in this situation but with inherited wealth being so significant in the UK, it'll be interesting to see how often pensions do end up being taxed 40% IHT.

 

[Bald Rick]

What I was thinking of was that, in his July 1997 Budget, Chancellor Gordon Brown abolished tax credits on company dividends received by pension funds.

Ah, I see. That’s not a tax on you though, it’s a tax on the pension fund (In the same way it is for everyone else who takes company dividends outside a pension or ISA)

 

[Merle Haggard]

Ah, I see. That’s not a tax on you though, it’s a tax on the pension fund (In the same way it is for everyone else who takes company dividends outside a pension or ISA)

For clarity, I'm in a section of the BR Pension Fund.
I think it has the effect of reducing the assets of the fund - which will be measured against future liabilities, so contributions may have to go up.
Said to be the reason for the death of many Final Salary pension funds.

As an aside, I briefly had a 'Unit Trust' type ISA and I still paid tax on the dividend payments from its investments (the dividends were retained within the trust - not paid out to me, it was capital not income one). Couldn't find out why, but that particular unit trust was a poor performer compared to my non-ISA ones, which may or may not be a coincidence. I simllarly found that the coincidence that cash ISAs generally offered lower interest rates than non ISA ones but maybe I didn't look hard enough.

 

[Bald Rick]

As an aside, I briefly had a 'Unit Trust' type ISA and I still paid tax on the dividend payments from its investments (the dividends were retained within the trust - not paid out to me, it was capital not income one)

You might want to check that, or you’ve been had. I have paid precisely £0 on my Unit Trust ISAs.

 

[JamieL]

Interesting thread. I think there is growing acceptance that the Welfare State is growing too big and is unsustainable - sooner or later the Triple Lock will need to go on the State Pension and more broadly there needs to be a much more hard-nosed view on entitlement to benefits. A minimum wage job should provide a lifestyle manifestly better than someone on benefits and given we are probably near saturation level on how high the minimum wage can go, benefits probably need to go down in value. Of course, you can't lower benefits but you can freeze them and also maybe apply an PAYE style 5% tax charge applied at source to all such payments. We should stop giving NI credits for non-workers. Why do we fund schemes like Mobility when £millions are spent making public transport accessible? Accesses charges should be considered for NHS services. Difficult choices ahead.

 

[Merle Haggard]

You might want to check that, or you’ve been had. I have paid precisely £0 on my Unit Trust ISAs.

I think I was. It was an HSBC one and, when I queried it, the respondent said 'ask your financial advisor'. So I had a quick conversation with myself and closed the account.

 

[Morgsie]

Interesting thread and thank you to the comments regarding PIP, benefits traps, lack of support regarding mental health but it is learning difficulties too like autism, ADHD and so on. And thank you for understanding my previous comments on this topic. There are some on here who know of my personal situatuion, to them thank you for understanding. There is the forthcoming Timms Review into PIP which is set to be published later this year. Under the last Tory Government back in 2024, the Buckland Review into Autism Employment was published, one of the areas discussed was the lack of support. Key statistics include 3/10 autistic people in work 5/10 all disabled and 8/10 non-disabled, autistic graduates are twice as likely to be unemployed after 15 months compared non-disabled graduates with 36% enetering employment, autistic graduates are overqualified for the job they have and finally more like on 0-hour contracts and least likely in a permanent role. Buckland Review

There is also a comparative point which I am struggling wording but the UK has one of the lowest Welfare in Europe.

 

[Krokodil]

To me that makes sense. Tax should be levied on your total income

It would be a bit fairer if we moved away from the pretence that it's a contributory system and merged NI into income tax. Because of the personal allowance (which despite recent fiscal drag is still much higher in real terms than it was before 2010) it wouldn't affect low income pensioners much, but those with a higher income would end up paying the same tax as people below the state pension age.

 

[Bald Rick]

Because of the personal allowance (which despite recent fiscal drag is still much higher in real terms than it was before 2010)

Higher, yes, but not much higher.

2009-10 Tax Year it was £6475. Inflated by average earnings, that is now £11,525, ie about £1k more than now.

 

[Egg Centric]

With regard to obesity there are lots of causes. You sometimes for instance see two kids in a family and one is skinny and one is fat. From personal experience "food noise" i.e. being effectively permanently hungry can be an issue, and as it's innate it is surprisingly hard to resist at times. Thus the GLP1 medications will also fulfil a role. Injections were a barrier to adoption but pills won't be.

Assuming no major issues are found with them, once they go generic I think that will be the end of obesity and its associated health issues - those with "food noise" will just take them long term at a low dose to keep it manageable. How long is a patent, 25 years?

There's two diametrically opposed things here. It surprises a lot of people to hear this, but obesity is a bit like smoking* in that it's overall beneficial for the state (under current rules) because the decreased life expectancy means less in pensions. However it is front loading a lot of the costs because fatties like me are here now while our decreased state pensions aren't for decades.

Now that said I don't think that we should be aiming for an unhealthy population to reduce the pensions bill - it's just an interesting thing to note.

Instead I think we should be pretty obviously aiming for a very healthy population. And here it's absolutely crazy how difficult it is to get mounjaro etc on the NHS (you pretty much have to be dying, you need something like 3 or 4 specified serious obesity comorbidities). Sure, I can easily afford it personally, but for a lot of people it's impossible. So instead the NHS will be picking up the costs of either them meeting those comorbidities with the misery that'll be involved, or just dealing with the 2 or so that they have for years/decades as the other ones await coming on.

As for pensions, I have a pretty hard nosed view on this - from at least Norman Lamont people were being told the state pension wasn't going to be good enough. The triple lock is a disgrace.

*the economics for smoking are far more clear cut - that's incredibly good for the exchequer as you don't get diabetes and other chronic conditions etc so much, you just keel over and have a heart attack or die of aggressive lung cancer or something

 

[SuspectUsual]

Two points about the state pension.

Firstly, the retirement age is too low. Context - a 65 year old man retiring from work 50 years ago had a further life expectancy of 12.1 years. Today, that 65 year old has to work for two more years, but upon retiring at 67 he can expect to live another 18.0 years. So the state is funding 50% more years - that must change.

Secondly, the triple lock has to go. The link to earnings and the 2.5% lower limit are irrelevant - all that matters is maintaining buying power via a link to CPI

(And I'm writing this as someone who has effectively retired from work but isn't yet a state pensioner)

 

[brad465]

Two points about the state pension.

Firstly, the retirement age is too low. Context - a 65 year old man retiring from work 50 years ago had a further life expectancy of 12.1 years. Today, that 65 year old has to work for two more years, but upon retiring at 67 he can expect to live another 18.0 years. So the state is funding 50% more years - that must change.

Secondly, the triple lock has to go. The link to earnings and the 2.5% lower limit are irrelevant - all that matters is maintaining buying power via a link to CPI

(And I'm writing this as someone who has effectively retired from work but isn't yet a state pensioner)

The state pension does need to be means tested, however, given how many claimants vote, and how the WFA debacle went, any party trying this or other reforms to state pensions will commit electoral suicide.

 

[GusB]

Interesting thread. I think there is growing acceptance that the Welfare State is growing too big and is unsustainable - sooner or later the Triple Lock will need to go on the State Pension and more broadly there needs to be a much more hard-nosed view on entitlement to benefits.

There is already a hard-nosed view on entitlement to benefits. It began with the Labour government in 1997 and continued with the LibCon government from 2010. The latter system is still in place and the conditionality remains.

A minimum wage job should provide a lifestyle manifestly better than someone on benefits and given we are probably near saturation level on how high the minimum wage can go, benefits probably need to go down in value.

"Should" is doing a lot of heavy lifting here. Assuming a 40 hour week at £12.71 per hour, take home pay after tax and national insurance is around £21,999, or £1833.00 per month.*

For me, as a single person, it's a reasonable enough income that I could quite easily live on. However, it all depends on where someone lives as to how much they pay in rent each month. A single bedroom property is in the realm of £550 a month, while two-bed properties are around £650-750; there are areas where rents are much, much higher, though. Throw a couple of kids into the mix and suddenly you need a three-bed, so the rent is now £1200 and council tax has increased too. There's not much of your £1833 left now, is there? That's before you account for utilities, transport, food and clothing.

You don't want to increase the minimum wage any further and you don't want anyone to claim benefits either. Either we increase the amount that people can earn, or we need to take steps to slash the cost of living. Something has to give.

* Source - https://income-tax.co.uk/after-tax/26436/

Of course, you can't lower benefits but you can freeze them and also maybe apply an PAYE style 5% tax charge applied at source to all such payments.

Benefits already count as taxable income and universal credit for a single adult 25 and over is £5098.80 per annum. Housing payments are variable and will bump this figure up but won't necessarily put the amount over the threshold for paying tax. Why should someone whose income is below the tax threshold be paying tax?

We should stop giving NI credits for non-workers.

Why? What about someone who has to give up work to look after a sick, elderly or disabled relative? Carers save the state an absolute fortune and receive an utter pittance in return, and you want to remove their NI credits?

Why do we fund schemes like Mobility when £millions are spent making public transport accessible? Accesses charges should be considered for NHS services. Difficult choices ahead.

Not this old chestnut. While lots of money has been spent on making public transport accessible, it's not always suitable for everyone with a disability and you're also assuming that it either exists in the first place or runs at the times when people need to travel.

 

[Krokodil]

Higher, yes, but not much higher.

2009-10 Tax Year it was £6475. Inflated by average earnings, that is now £11,525, ie about £1 more than now.

£6,475 in 2010 is £10,307 now, according to the Bank of England. The Personal Allowance is £12,570. Even with your figure it's not £1 more.

 

[Bald Rick]

£6,475 in 2010 is £10,307 now, according to the Bank of England. The Personal Allowance is £12,570. Even with your figure it's not £1 more.

I was using average earnings rather than the BOE calculator, simply because income tax is generally paid on earnings.

The £1 is an almighty typo on my part, should be £1k. now corrected, apologies.

 

[Dave61]

Two points about the state pension.

Firstly, the retirement age is too low. Context - a 65 year old man retiring from work 50 years ago had a further life expectancy of 12.1 years. Today, that 65 year old has to work for two more years, but upon retiring at 67 he can expect to live another 18.0 years. So the state is funding 50% more years - that must change.

Secondly, the triple lock has to go. The link to earnings and the 2.5% lower limit are irrelevant - all that matters is maintaining buying power via a link to CPI

(And I'm writing this as someone who has effectively retired from work but isn't yet a state pensioner)

Tell that to my dad who only made it to 64
And yes I managed to retire at 63 (65 now) but only because I had a decent private pension (and redundancy), my reason for retiring early is that I am fit and able to enjoy the fruits of my years of labour. In another 18 years (if I am still on this mortal coil) I could well be shuffling around in my zimmer frame waiting for the end to come as we have no idea what the future holds. We want to enjoy our retirement - not sit there staring at 4 walls as that is all that we can do.

 

[Bald Rick]

There's two diametrically opposed things here. It surprises a lot of people to hear this, but obesity is a bit like smoking* in that it's overall beneficial for the state (under current rules) because the decreased life expectancy means less in pensions. However it is front loading a lot of the costs because fatties like me are here now while our decreased state pensions aren't for decades.

Kind of. But being off sick / dying of smoking / obesity related diseases whilst still working reduces our economic efficiency snd ultimately output.

 

[Dave61]

£6,475 in 2010 is £10,307 now, according to the Bank of England. The Personal Allowance is £12,570. Even with your figure it's not £1 more.

However you work it out it is still a drag as more and more people are caught up in the net. Manage more than 20 hours a week at minimum wage and you are paying tax.

 

[Krokodil]

However you work it out it is still a drag as more and more people are caught up in the net.

People who would have been caught in it 15 years ago.

 

[Egg Centric]

A minimum wage job should provide a lifestyle manifestly better than someone on benefits and given we are probably near saturation level on how high the minimum wage can go, benefits probably need to go down in value.

No, what we need is sensible marginal tax rates. While for many who would be proposing being nasty to those on benefits the pernicious 100-125k marginal (net) rates are the most obscene, with >100% at the 100k cliff edge if you have kids and about 67% with withdrawal of personal allowance up to the 125k, there is an even more awful at the bottom end marginal rate of over 70% with the universal credit taper (and there are loads of cliff edges down there as well, you come off benefits and suddenly you start losing access to all sorts of really nice free things, it is not possible to entirely stop this but it needs to be far less violent). There was a recent thingy where the UK population were asked if they'd rather have a certain 50k or 50/50 chance at a million, and an insane number were going for the 50k. The only reason really that this was insane was because if you are poor enough for the certainty of 50k to make sense, you are going to lose out on benefits almost immediately unless you either put it straight into a pension or try to buy a house with it - but if you're on benefits you're not buying a house with 50k (well maybe in Hartlepool). But I think very few people understood this subtlety, instead castigating those of us who said going for the 50k was nuts for being out of touch...

Anyways, I can see a logic for making it lower at the absolute bottom (so long as this doesn't apply to those who genuinely can't work at all) but it absolutely must be coupled with a more humane taper and greater asset limits (see above) as people get in to work. This will acheive what you're saying about minimum wage giving a much better lifestyle and also mean that those who for whatever reason can't manage it but can manage something a bit more part timey don't lose out.

The incentives are nuts atm on the whole income spectrum, except arguably the "squeezed middle" where most people lie so they're not really aware of how screwed you are at either other end (unless you start going well off the deep end, either descending into black market/addiction/homelessness at the lowest end or genuine multi-millionaire+ at the higher end, where things start entering their own special worlds again and are beyond most of our ken really).

 

[Dave61]

People who would have been caught in it 15 years ago.

But the point is that it has been frozen since it last increased in 2021 and is not going up again until at least 2028. Yes wages have increased a lot but so has the cost of living which impacts the lower paid even more.

 

[JonathanH]

No, what we need is sensible marginal tax rates. While for many who would be proposing being nasty to those on benefits the pernicious 100-125k marginal (net) rates are the most obscene, with >100% at the 100k cliff edge if you have kids and about 67% with withdrawal of personal allowance up to the 125k, there is an even more awful at the bottom end marginal rate of over 70% with the universal credit taper (and there are loads of cliff edges down there as well, you come off benefits and suddenly you start losing access to all sorts of really nice free things, it is not possible to entirely stop this but it needs to be far less violent).

It is a shame that this is always interpreted as a high marginal tax rate, since the logic of higher earners paying a greater proportion of their income in tax certainly isn't a flawed concept.

One of the upcoming challenges for society is the impact of artificial intelligence and further offshoring on higher paid individuals (and indeed some lower paid individuals) and I just don't really see how any political party could be seen to be reducing tax on the higher paid, at the same time as tax revenues collapse.

Quite where the outcome of AI-led workforce transformation leaves the welfare state in a few years time is a huge uncertainty, and you wonder how the Treasury is modelling it.

 

[JamieL]

One of the upcoming challenges for society is the impact of artificial intelligence and further offshoring on higher paid individuals (and indeed some lower paid individuals) and I just don't really see how any political party could be seen to be reducing tax on the higher paid, at the same time as tax revenues collapse.

It strikes at the very issue underlying this thread though - net-contributors and net-non-contributors. The former encompass the very people who are absolutely critical to keeping society running and are being very heavily taxed to the extent that it is encouraging many to retire or downscale. Whilst the latter are enjoying a subsidised lifestyle that, whilst not luxurious, is sufficient to deter many from self-improvement and advancement. As you note, AI will hit tax receipts hence why the benefits bill must be tackled - everyone should be incentivised to work and the welfare state should reduce to being an emergency safety net only.

 

[Egg Centric]

It is a shame that this is always interpreted as a high marginal tax rate, since the logic of higher earners paying a greater proportion of their income in tax certainly isn't a flawed concept.

1. Are you saying what can be 69.5% in Scotland isn't a high marginal tax rate?
2. Even if you are, by what logic is it right that someone earning 110k should be paying a higher marginal tax rate than someone earning 200k?
3. And as I also said, extend this logic to the lowest paid as well where the tax rate from universal credit taper is even higher.
4. And then you have parents on about 55k who are stuffed as well

Here's a fun article that doesn't take into account the universal credit taper (and so would have a big tick upwards on the left hand side as well from Dan Needle: https://taxpolicy.org.uk/2023/09/24/70percent/

(Image shows crazy actual marginal tax rates in 2023, all over the place - would be even worse if it included universal credit taper)

In what planet does this make sense?