8 Creative Ways to Reduce the Cost of the State Pension

The growing cost of the state pension due to the enduring triple-lock increase combined with an ageing UK population is creating a financial headache for government. While efforts to raise the pension age are important to reduce those costs over time, we also need creative solutions to reduce pension costs immediately.

The below eight ideas offer some creative solutions that can be used individually or better be combined to make a powerful incentive for people to forgo some or all of their state pension, creating immediate savings for government to help get spending and debt under control.

Debt Swap

Allow people to swap their annual state pension for the equivalent value in UK index-linked gilts. This variable interest rate debt is costing the government billions in extra interest payment costs each year, and most is owned by overseas entities so does not flow into the UK economy.

People with a reasonable private pension income could therefore trade their pension for that debt; they would still receive some income in interest on that debt, and new regulations would also allow them to pass it onto their families free of inheritance tax as a further incentive. As the interest would go to UK citizens and therefore be spent in the UK economy, it would also further help to reduce the overall cost of UK government debt servicing.

Charity Debt Donation

Similar to the above, but this time people could donate the debt to a UK registered charity, providing the charity with an income from the interest received, helping them to build a reliable endowment fund for their organisation.

The debt would be designed so that it did not have to be repaid in full in the short-term, automatically rolling over and the government continuing to pay interest for as long as they did not repay the full amount.

Forfeit for Inheritance Tax Relief

An idea shared in other sections of the Idea Bank, people would be offered the chance to pay no inheritance tax on their estate if they forfeited their pension for life and invested 5% of their wealth into a UK Taskforce fund to fix our energy and housing system to reduce costs for citizens and help to grow the economy.

Pension Swap for Inheritance Tax Relief

A variation on the above, people could forfeit their pension, or some part of it, and that amount that they forfeited would be taken off their inheritance bill for their estate. For example, if someone’s estate owed £180,000 in inheritance tax but they had forfeited their pension for 5 years (saving the state £60,000), their inheritance tax bill would be reduced to £120,000.

This would enable the state to get the revenue from inheritance tax earlier, without having to wait for people to die, increasing tax revenues/saving government spend immediately to reduce borrowing and associated debt costs.

If It’s Down, It’s Down Together

An obvious concern for many is that they may sacrifice their pension but others won’t follow suit, and the people who have mismanaged the country  for decades will still enjoy a gold-plated state pension.

People would therefore be offered a deal where however much of their pension they sacrificed, public sector pensions (of high-earners) would be reduced by 1.5 times that value.

So, for example, when someone sacrificed £12,000 of their pension, public sector pensions (including those of MPs) would be reduced by £18,000.

These reductions would only affect those on the highest pensions; frontline NHS staff, soldiers and the like would not be affected, the drops would first target those whose pensions were greater than £50,000 per year, and then those whose pensions were greater than the median UK salary.

As such, the pension sacrifice scheme would hit the highest paid public servants only, offering a satisfying outcome to those who sacrificed their pension while protecting hard-working, lower-paid frontline public sector staff from pension cuts.

Give a Slice

Many people may not be able to forfeit their whole pension, but they could forfeit some of it. While the 1 million or so higher rate pensioners in the UK may be able to forfeit all of their pension, those earning less would struggle to do so. However, if all 13 million or so state pensioners were able, on average, so forfeit £1-2,000 of their pension each year through the ideas set out above, that would provide a saving to government of £13-26bn per year, a large sum that would help balance the budget.

Saviour Membership Card

People that forfeited their pension would receive a ‘saviour’ card thanking them for the savings, which would entitle them to discounts on ‘Taxpayer Tuesdays’ once a month as well as a selection of other benefits, such as priority tickets to events and exclusive discounts offered by government and private sector organisations.

Akin to the ‘eat out to help out’ scheme during Covid, the cards would create a visible symbol to make forfeiting a pension a conspicuous act, rewarding those who did so. Cards would offer different discounts based on the amount forfeited, with bronze, silver and gold cards for partial forfeits and platinum for anyone that forfeited their entire state pension.

Similarly, the membership benefits would work on the bronze to platinum scale offering, for example, priority booking for Wimbledon tennis or FA cup final tickets, as well as discounts on hotels and holidays from private providers.

Such a scheme could also generate funds for government by charging companies to offer their discounts, akin to Groupon and other such sites, ensuring the cost of managing the scheme was paid for by those charges rather than out of taxpayer funds.

Lottery Swap

People could choose to forfeit some or all of their pension in exchange for being entered into a weekly pensioners lottery, which would offer prizes of £10,000 each week, awarded from the money saved from those who forfeited.

To ensure the government saved money, only 50% of the money forfeited by pensioners would be used for the prize pot, the rest would be returned to government coffers to reduce spend and borrowing.