Tuesday, 26 June 2012



Let me declare an interest. I am old enough to get the £200 tax-free Winter Fuel Payment and free local bus travel anywhere in England. As I live in London my travel Freedom Pass extends to local bus and tube travel throughout London at any time of day and to local trains from 0930 on weekdays. I guess the whole package is worth £700 a year to me, tax-free. Though in fact if I paid for London travel I would claim back much of the cost from clients and customers.

So. That’s that out of the way. Well almost. I do not in the slightest need that money. If it disappeared tomorrow I would shrug and say ‘so be it’. It would not leave me freezing in the winter and cut off from family, friends or the local library. Or, come to that, work.

So I get it; I do not need it; and the amount is small enough in my personal financial affairs that whether I get it or not is neither here nor there. So that leaves me uniquely able to say unequivocally that it would be complicated, counterproductive, and wrong to stop Winter Fuel Payment and free bus travel in England for those over women’s state pension age (see footnotes). Here’s why.

First, complicated. Who would you take it away from? Everyone who admitted they didn’t need it? Everyone called Paul? Everyone who paid higher rate tax? That would be possible but it would create a cliff edge at an income of £42,385 – earn an extra £1 or your pension rises £1 a year and you would lose £200. And it would not save much. The Government has estimated that ending it for households with an income above £35,000 would save just £270 million out of the total cost of more than £2 billion. The administrative cost could be £25 million a year or more – the amount estimated for administering the child benefit tax charge which began in January 2013.

You would save more by following what one tweeter suggested to me recently. Go down the income scale and only give these benefits to those poor enough to pay no income tax. Then the cliff edge would move down to £10,600 in 2015/16 and £11,000 in 2016/17. That would save more but would certainly take it away from many who did need winter fuel payment to keep warm in winter or free travel to see family and friends and visit the nearest town. 

Another problem is that these are individual entitlements so the non-taxpaying spouse or civil partner of a higher rate taxpayer would continue to get it. The only way round that is to impose a joint means-test such as that now imposed on child benefit recipients - and which the theoretical savings above are based on.

The same problem would be found if the payment was taxed as income. Where two pensioners share a household the £200 is split in two - £100 each. So each partner would have to be taxed separately on it. And where one partner earned, say, £1,000,000 a year and paid 45% tax on the payment a partner may have no taxable income and pay nothing. So a household where many think the payment is not needed would still keep £155 of it. 

There would also be problems where the payment just tipped someone over from being a non-taxpayer to paying tax. How would the right amount be collected if, for example, winter fuel payment pushed an individual £50 above their tax threshold and owed £10 tax? Solving those problems would be expensive and a back of the envelope calculation suggests the tax take might be less than £200 million a year. 

Now, I know your next argument. It is one I have made myself. Surely, you are thinking, surely all that Oxbridge brain power in the civil service can come up with SOME scheme to rid me of these turbulent pensioners? Well, they might. They did come up with a scheme to tax child benefit at up to 100% where a parent has an income over £50,000. That seems to have gone quite well, though many may have slipped through the net. 

So that is the ‘complicated’ bit.

Now ‘counterproductive’. The thing about these universal benefits – ones that you get on grounds of age or condition – is that they go to everyone. Those who need them do not have to declare their poverty to get them. If they do have to take that step then many simply do not claim. More than two million older people fail to claim up to £5 billion in means-tested benefits they could get if they applied. Paying them to me is the price we pay as a society so that my neighbour Marjorie, too proud to claim means-tested benefits though she needed them, at least got her winter fuel payment and free bus travel – though she could use that very little in her last years. If you means-test free bus travel and winter fuel payment then poverty among pensioners would grow as many who needed them failed to claim what they could get.

And finally ‘wrong’. In a way this is an extension of counterproductive. Some countries call the government departments that run social security or health the Ministry of Solidarity. Because state benefits represent solidarity. Between the sick and the well. Between the jobless and those in work. And, of course, between young and old. There are times and circumstances in life when the state should step in and transfer money from one group to another. Just as the childless pay for schools. The law abiding pay for the police force and the courts. And those without solar panels on their roof pay for those who get cheaper power from them. 

In summary, taking winter fuel payment and free bus travel away from richer older people would save relatively little, cost a lot in administration, increase poverty among the old, and undermine solidarity between the generations. 

Women’s state pension age
Winter fuel payment is paid to people if they reach the state pension age for women in the September before the winter. Qualifying birthdates are listed here www.paullewis.co.uk/statepensionage/WinterFuel_AS.pdf though of course it may not last for as many years as this theoretical table suggests! In England free bus travel begins at women’s state pension age – which will rise to 63 from April 2016. London Mayor Boris Johnson has brought down the age for free public transport travel down to 60 for London residents, though the individual does not join the national Freedom Pass scheme until they reach women's state pension age. Ditto Merseyside. The qualifying age is still 60 in Scotland, Wales, and Northern Ireland. The age for free prescriptions is 60 in England. In the rest of the UK they are free for everyone.

26 December 2015
version 1.5

Thursday, 7 June 2012


The Treasury is trying to work out how to tempt individual savers use some of the £500 billion cash they have in the bank to fund its ambitious National Infrastructure Programme.

If it can be done it would fulfil two key objectives. First, savers would get a bit more than the dismal 3% or so that is currently on offer even to active savers who move their money regularly. Second, it would get new money into roads, rail, trams, housing, telecoms and so on which would create jobs, help companies and boost the economy. And all without it being booked as Government debt.

But both parts are tricky. Savers with cash in the bank are cautious. They want to know that their money is safe. Even if it does not go up very much, cash uniquely cannot go down (and email me if you are thinking 'what about inflation?' it would take too long here). So any growth bond would have to offer a clear hope of a better return than cash but some sort of protection against loss.

And that brings us to the second tricky part. How to keep the loan - for that is what it is - off the Government books? It already has a debt of more than £1 trillion and is expected to borrow another £120 billion in 2012/13. The Coalition is committed to borrowing less not more. So is it possible to bypass the national accounts by getting savers to lend money directly for infrastructure projects? I am told by someone close to the process that it is this step which is proving very difficult. Especially if savers are to be given any sort of government guarantee.

A similar scheme is being developed by the UK's pension industry. The National. Association of Pension Funds will soon be piloting a Pension Investment Platform to pump initially £2 billion into infrastructure projects. Eventually it could be ten times as big. Like any professional investor the funds want certainty and a good return. One example might be road building or widening. The income stream would come not from a toll - too risky and the M6 toll road has lost money every year since it opened - but from a Government payment per vehicle. They hope for returns of 2% to 5% above inflation.

Retail investors might be tempted with rather less than that. Especially if the offer was sweetened by making returns tax free. There is nearly £400 billion in ISAs, half in cash, just on that promise. But to tempt cash savers with money in the bank the growth bonds would need some sort of protection against loss. And that has to be done without adding the loan to the Government's debt.

If that trick can be pulled off then an infrastructure programme funded by the public would fit in well with Liberal Democrat policy and the public statements of deputy Prime Minister Nick Clegg.

If it can't then growth bonds seem unlikely to leave the bright ideas box and enter the real world.

Tuesday, 5 June 2012


The end of free banking in the UK was signalled on 24 May 2012 by Andrew Bailey.

If you wonder who he is, then have a look at a £10 note. His signature will be there as Chief Cashier. Andrew Bailey has now been promoted to Executive Director at the Bank of England. And from next year he will almost certainly be a deputy Governor of the Bank and Chief Executive of the Prudential Regulation Authority.

Never heard of the PRA either? Don’t worry it doesn’t exist yet. It is one of the two separate regulators that will emerge when the Financial Services Authority splits in two next spring. The other is the Financial Conduct Authority. The PRA will be able to intervene in the market if it feels that major financial institutions are not behaving in the public interest.

And on 24 May Andrew Bailey told us what he would like to do when (OK, ‘if’) he takes on that role.

“the reform of retail banking in this country cannot move ahead unless we tackle the issue of free in-credit banking, and have a much better sense of what we are paying for and how we are paying.”

And he warned “it may require intervention in the public interest, not least because it is a way to encourage greater competition.”

In other words he would use his powers to make banks charge us all for our current accounts.

The "myth" of free banking
Most people in the UK believe that they have ‘free banking’. If they keep their current account in credit then there is generally no charge for most of the services the banks perform for us including making and receiving payments, keeping our money safe and letting us have free access to our money through a network of 36,000 cash machines.

Those are valuable services and – free as they seem – someone has to pay. In fact we all pay the cost in two ways. First the banks lend out our money at a profit. Second they charge us heavily when we go overdrawn or travel abroad.

The Office of Fair Trading estimated that banks made £8.3 billion between them from personal current accounts in 2006 – more than they make from savings accounts and credit cards combined.  Most of that was made up of £4.6 billion from interest earned on our money (and charging us high rates of interest when we are overdrawn) and £2.6 billion from direct overdraft charges.

That is why Andrew Bailey believes free banking is a myth and that competition would be better if we paid openly for the valuable services the banks provide us with.

Why they don’t charge
The banks would love to charge us for our current accounts and the services they provide with them. And they all offer us the opportunity to pay for a current account – the charges range from £24 to £300 a year. But most people wisely turn down the offer of paying for a current account they could get without paying a fee. The banks bundle in an insurance policy or two – which most people do not need – and other benefits which – with the odd exception – are generally not worth the monthly cost.

But there is an insurmountable barrier that stops the banks charging all of us for the banking services on our 130 million current accounts.

If one of them started charging for all its current accounts then it would lose customers to competitors who continued to offer free banking.

But if they agree to do it together they will be guilty of anti-competitive behaviour and could be fined up to 10% of their turnover – potentially billions of pounds.      

So they are stuck with the present system. And that is why Andrew Bailey made it clear that he would like to cut that Gordian knot by intervening in the market to make sure they could charge. He would probably do that by saying that keeping the cost secret was anti-competitive and charging would encourage competition and that would ultimately be good for us.

Public reaction
If he does decide to intervene he faces several problems.

First, what do you do about the 9 million people who have a basic bank account? The banks agreed more than ten years ago to introduce these simple accounts with no overdraft facility. It was partly to reduce the number of people who had no bank account and faced higher costs and greater inconvenience in managing their money. The new accounts were also needed to help the Government’s own policy to pay state pensions and benefits directly into a bank account and scrap the costly system of paying them by giro or order book. The new Universal Credit, which will replace many benefits from October 2013, will only be paid through a bank account.

If there was a charge for all bank accounts some excerption would have to be made for people on benefits. And that would probably mean a tightening of the criteria for access to basic bank accounts – which currently are also used by those with poor credit records and on low incomes from work.

Second, public reaction from the middle swathe of society who do not go overdrawn and do not believe they pay for their banking would be hostile. Many are not on high incomes and would complain vociferously if the Government (as they would see it) forced them to pay for a current account which, through careful management, they currently keep free.

Third, a current account is now such an essential part of life that charging people to use one would seem like a tax on living. It would be particularly hard for those in low paid jobs whose employer insisted on paying into a bank account as most of them now do.

Fourth, would he ban any bank from not charging for a current account? If so, that in itself could be seen as the most anti-competitive move of all.

Andrew Bailey recognises some of these problems. He said “I know from last time I raised the subject that the reaction is mixed.”

But he warned that would not put him off.

“I am like a dog with a bone on this one, I don’t think we will have a retail banking industry that is properly serving the interests of the public until we tackle the dangerous myth of free in-credit banking. “

The official Bank of England line is rather milder. A spokesman told me “He was speaking to stimulate debate on an important topic.”

Personal current accounts in the UK, Office of Fair Trading July 2008

The future of UK banking – challenges ahead for promoting a
stable sector, Speech by Andrew Bailey at Westminster Business Forum 24 May 2012 http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech574.pdf
The final paragraph is the relevant one.