Should well-off pensioners give back their benefits?

As Iain Duncan Smith urges wealthy pensioners to hand back extra payments, we take a look at what retirees actually get.

Iain Duncan Smith, Secretary of State for Work and Pensions, sparked a lively public debate this week when he suggested that prosperous pensioners should give certain welfare benefits back to the state.

Duncan Smith, who himself turns 60 next year, attracted some bitter responses. In particular, critics argued that it was hypocritical to hear about financial sacrifice from a millionaire Cabinet minister who married a Baron's daughter and lives in a country house on her father's estate.

Then again, IDS did ask an important question: should wealthy pensioners with no need of extra benefits give these up so that poorer folk can benefit? Let's examine the facts of this argument by finding out what pensioners can claim.

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Eight benefits for pensioners
What pensioners get from the state at retirement usually depends on three things: their age, gender and record of paying National Insurance contributions (NICs).

1. The basic State Pension (taxable, contributions-based)
The foundation of state support for retirement is the basic State Pension. Formerly paid at 60 for women and 65 for men, State Pension age is being equalised and raised over time. Depending on your current age and gender, your State Pension age could range from 61 to 68 years. Here's the official State Pension calculator so you can find out.

In the 2013/14 financial year, the full basic State Pension is £110.15 a week, or £5,727.80 a year. This income is taxable at your highest rate, so a few rich pensioners lose 45% of this payment to the taxman.

2. The Additional State Pension (taxable, contributions- and earnings-based)
As well as the basic State Pension, you may be entitled to an extra payout known as the Additional State Pension. How much you receive will depend on your NIC history and previous earnings.

Calculating your Additional State Pension is horribly difficult, so the best way is to get a pension forecast. As with the basic State Pension, the Additional State Pension is taxable.

3. Pension Credit (tax-free, means-tested)
Once you reach your State Pension age you may be able to claim an extra payment known as Pension Credit. This tax-free, means-tested benefit tops up your weekly income if it is below £145.40 for a single person or £222.05 for a couple in the 2013/14 tax year.

Although Pension Credit is one of 32 different tax-free Government benefits, means-testing ensures that it is not paid to pensioners who already enjoy reasonable incomes.

4. Free TV Licence (tax-free, not means-tested)
A colour TV Licence costs £145.50 a year, but pensioners aged 75 and over can claim a free TV Licence that renews every three years. Like Pension Credit, this benefit is tax-free, but is not means-tested. In other words, all pensioners 75 and over qualify for this payout, regardless of income.

Then again, one must apply for this benefit to get it, so rich or generous pensioners could turn it down simply by not applying.

5. Free bus pass (not means-tested)
Another tax-free top-up that is not means tested is the free bus pass. This gives older people free off-peak travel on local buses anywhere in England. Similar schemes operate in Scotland, Wales and Northern Ireland.

Eligibility is based on State Pension age, so you have to be at least 60 years old. For frequent bus users, this could save hundreds of pounds a year. Again, well-off pensioners who feel they don't need or want a free bus pass can simply choose not to apply.

6. Winter Fuel Payment (tax-free, not means-tested)
The Winter Fuel Payment is a tax-free lump sum to help older Brits with their heating bills.

Depending on the severity of the weather, it ranges between £100 and £300. It is paid automatically between November and December to those claiming State Pensions. To be eligible for this year's payment, you must be born on or before 5th July 1951.

Some older Brits -- including celebrities such as Lord Sugar and Peter Stringfellow -- have complained that they would opt out of receiving this 'free money', were there an established mechanism to do so.

7. Free NHS prescriptions (not means-tested)
Brits aged 60 and over get free National Health Service prescriptions. Since 1st April NHS prescriptions in England cost £7.85 per item, so this is a big saving for pensioners requiring regular medication.

8. Christmas Bonus (tax-free, not means-tested)
The Christmas Bonus is a tax-free sum of £10 given to people claiming certain benefits, usually paid in the first week of December. This is handed out automatically, regardless of income. While £10 wouldn't even buy a round of golf for a wealthy pensioner, it could be a blessing to those struggling to get by on state benefits.

The benefits system is fiendishly complicated. For independent advice on navigating this complex labyrinth, try Turn2Us's benefits checker.

These benefits are safe...for now
Prime Minister David Cameron has clearly confirmed that these retirement benefits will be protected for this entire Parliament -- a promise which extends to the 2015/16 tax year. So only after the General Election in 2015 could the Conservatives tinker with these payouts -- assuming they win the next election, that is.

All political parties are terrified of upsetting older voters, as there are more than 11.5 million people claiming the UK State Pension today. Even so, it is worth asking whether a retired person with an income of, say, double the UK's average wage should receive tax-free, non-means-tested benefits potentially worth thousands of pounds a year.

Opt-out of, tax or donate benefits?
Rather than asking pensioners to return these payments voluntarily, the Government should take steps to establish robust, efficient opt-out procedures. Going further, making these benefits taxable or means-tested only for the wealthiest retirees would free up funds to improve support for poorer pensioners.

Alternatively, the Government could encourage prosperous pensioners to donate these extra payments to charities. By using Gift Aid, pensioners can boost these donations and also reduce their tax bills. In this scenario, the public, worthy causes and well-heeled pensioners all benefit, so this option is well worth highlighting.

I know that some pensioners are really keen to opt out of these extra benefits. Indeed, just last month, one of my wife's parents turned 75 and thus qualified for payments that they simply don't need. It's high time that politicians 'grasped the nettle' by tackling generous state payouts to rich pensioners. Otherwise, these additional payments will probably end up as extra pocket money for my children!

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