5 December 2012

Who wants to be a millionaire?

… I don't.
Have flashy flunkies everywhere? I don't.
Who wants the bother of a country estate?
A country estate is something I'd hate.
Who wants to wallow in champagne? I don't.
Who wants a supersonic plane? I don't.
And I don't 'cos all I want is you.
etc Cole Porter (High Society, 1955)

But before one turns one’s back on wealth, what defines a millionaire in modern Britain? Ed Miliband, in his ‘One Nation’ Party Conference Speech in October, said:
… What do [the Government] choose as their priority? A tax cut for millionaires. A tax cut for millionaires. Next April, David Cameron will be writing a cheque for £40,000 to each and every millionaire in Britain. Not just for one year. But each and every year. That is more than the average person earns in a whole year. At the same time as they’re imposing a tax on pensioners next April. Friends, we, the Labour Party, the country knows it is wrong. It is wrong what they’re doing. It shows their priorities. And here’s the worse part. David Cameron isn’t just writing the cheques. He is receiving one. He’s going to be getting the millionaire’s tax cut.
So his definition of a miilionaire was someone earning £1 million or more a year. I wonder if Cameron actually achieves that, even with private income on top of his PM’s salary of £142,000. But for other people the definition of a millionaire is the less demanding one of someone who has wealth of over £1 million rather than that amount of annual income. But what is wealth? The Office of National Statistics (ONS) has been engaged for some time in a Wealth and Assets Survey. This has been producing some interesting data, for example the regional (particularly north-south) variations in wealth in the UK (to be in the wealthiest 10% of households the asset level is £967,000 and over – not quite £1 million), shown below. I suspect that the SW region, if sub-divided,would show a gradation from darkest to lightest, east to west. 

But their approach poses a problem in definition, as the pie chart below makes clear. It shows how the “economic wealth” of all the households in the UK, about £10 trillion (or £1000 billion) was defined for the purposes of the survey:

As can be seen, about 46% is in the form of private pension investments and another 33% in property. The relevance of either of these to personal affluence is arguable. A private pension investment is a constrained form of wealth because it can only be accessed as an annuitised income stream (usually a pension) after a certain age until death. While in payment it is subject to income tax. As far as property is concerned, certainly for the owner, net of any mortgage, it is an asset which can be realised. However, we all have to live somewhere at some sort of cost.

These distinctions matter when people start to throw around numbers relating to pensioner millionaires and the fairness of them receiving benefits such as the winter fuel allowance during a time of austerity. Take, for example, Rachel Sylvester in The Times at the end of October:
According to a forthcoming report from the Intergenerational Foundation [IF], the number of wealthy pensioners is rising rapidly, with almost 2 million people over 60 in households with assets above £1 million and 988,000 millionaires over 65. Its analysis concludes that the Government is spending about £500 million a year on winter fuel allowance and free bus passes for millionaires. That can’t be right. The motto “we’re all in it together” is only valid if it applies to old and young, as well as rich and poor.
Indeed “That can’t be right” if only because there are several things wrong here. Firstly, there’s a clear misinterpretation of what IF said in their report. They do provide an estimate of nearly 2 million (1,855,300 actually) people over 60 in households with assets above £1 million. And also 988,600 over 65 – but that is the number in households worth over a million, not individual millionaires. The distinction is important because the average household size for the over 65s is 1.39. Well, that’s what IF say (Table 5). Now, if Ms Sylvester and her spouse wanted to split their combined assets they would probably choose to divide them equally. And if those assets were less than £2 million, neither of them would expect to be classified subsequently as millionaires.

There is a more fundamental issue lurking here relating to private pension investments. How should their value be treated once turned into an income stream? Secondly, why ignore the value of public sector pensions prior to payment? One way of avoiding this is to look solely at income. Last month Chris Skidmore MP, one of the Free Enterprise Group of Tory MPs, produced a report with the snappy title of A New Beveridge: 70 years on - refounding the 21st century welfare state, with a section on Wealthy pensioners (page 19):
There are 100,000 households with a retirement income of more than £100,000 a year, and 988,000 over 65s in Britain who have assets worth at least a million pounds.
Neither of these figures is supported by a reference and the second is repeating Sylvester’s error above. Anyway, the report recommends that:
… the richest pensioners with separate incomes over £50,000 should no longer receive winter fuel allowance, a free bus pass and free TV licenses. (page 3)
While this avoids looking at wealth per se, it repeats the well-known anomaly of the child benefit ceiling, but for an older age group. For example, the household consisting of a former high-flyer, now with a £80,000 pension but whose spouse never worked possibly to help them get there, would receive fewer benefits than one with two less starry £40,000 pensioners and would also pay a lot more income tax! In a relatively early post here in February 2011 on the same subject (then raised by the Institute of Economic Affairs, which provides the Free Enterprise Group’s “administrative support”), I commented:
It is a matter of political judgement as to whether the ire of a particular group in society and consequent loss of votes is worth incurring.
Nothing seems to have changed yet, but if the economic situation deteriorates further, some withdrawal of these benefits seems inevitable – and at below £50,000 pa as well.


  1. "A private pension investment is a constrained form of wealth because it can only be accessed as an annuitised income stream (usually a pension) after a certain age until death."

    I think this statement is mistaken. Annuities are not the "only" method of drawing private pensions: there are various drawdown schemes.

    1. Thank you for taking the trouble to comment. Probably I should have left out the word “annuitised” but my point that a private pension fund is a constrained from of wealth still stands, I think, however it is accessed. However, even that may be a slight simplification in that such a fund can, I believe, be passed to a legatee, although then subject to a higher rate than normal inheritance tax. However, at that point there would be no entitlement to a bus pass nor WFA!

  2. Yes, you are of course right that all pensions are to some extent constrained (and so complicated - for example, I believe that currently there is no inheritance tax if the legatee is a charity - that the blog would be over-long if every aspect were covered).

    As home-owners tend to regard the house they live in as their main asset, I'm surprised that property accounts for appreciably less than the amount of wealth in private pensions (33% and 46%). Had I read more of the Wealth and Assets Survey the reasons for this might have emerged. However, I found your analysis of the data very informative, and the points about the writings of Sylvester and Skidmore interesting (though, perhaps naively, I think the political difficulties of withdrawing TV licences, bus passes and fuel allowances from richer pensioners would be too great).

    1. Again, comments are always appreciated. Interestingly last week’s Autumn Statement included a rise in the private pension drawdown level from 100% of the annuity rate to 120%. We can only wait and see what happens to some of these universal benefits. If it was realised across the country how much more valuable the Freedom Pass available to residents of the London boroughs is than a normal bus pass, there would be an outcry!