Tax relief for pension contributions

One loony right wing view (to which I subscribe) is that this sort of social engineering is madness, the best thing we could do is scrap tax & National Insurance relief for pensions contributions (total cost £38 billion, as against total cost of Basic State Pension of £47 bn, to get some perspective) and instead cut more damaging taxes (VAT, Employer's NI etc). For clarity - there would be no tax on money you withdraw from the capital element of your pension fund - in the same way as you do not pay tax when you withdraw money from a bank account.

The other loony right wing view is that people should not pay any tax at all on money put into a savings account, which, to achieve revenues of £X bn would mean higher rates on other income and would of necessity be regressive. These people have never described how it would work on an administrative level (if paying off a mortgage counts as 'saving', would taking out a mortgage be taxed in full as 'spending'? Or would taking money out of your savings account to pay off your mortgage could as 'spending', in which case, taking out a mortgage must count as 'saving'. And it that counts as 'saving', how do you distinguish between taking out a mortgage and running up credit card or other debts, which is clearly 'spending'?) and is a complete non-starter.

A sensible compromise would be to ditch principles, and look at a few facts and figures in deciding what the limit for tax relievable annual contributions should be:

Total market cap of FTSE All Share index, about £1,800 bn (as at last August).
Total number of employees/self employed 30 million.
Total UK government & local authority bonds in issue = £600 billion.
Total number of pensions (who have worked during their lives) = 10 million.

Let's assume that all employees/self-employed are saving the same amount over a forty-year working life. The average amount held in any pension pot would be £60,000 (£1,800 bn divided by 30 million savers), so we'd all start with nothing and end up with £120,000 on retirement. As the combined capital growth plus dividends is roughly equal to annual earnings growth, we can ignore that for simplicity. £120,000 divided by forty years = £3,000 per year. This is a good guide to the amount on which people can get tax relief each year.

At retirement, every saver takes his £120,000 pot and buys bonds (OK, you buy an annuity and the annuity company buys bonds, same thing really). So ten million pensioners would each own an average value of £60,000 in bonds (£120,000 on retirement, £0 on death). Ten million pensioners times £60,000 = £600 bn, in other words, annuity companies would own all UK government and local authority bonds in issue.

At current annuity rates, £120,000 is enough to buy an annuity of £5,473 for a 60-year old man or £3,956 for a 60-year old woman. That's an average of £90 a week.

So this idea that we can somehow all have handsome private pensions in retirement is complete nonsense, there just aren't enough shares and government bonds to go round! A tax system that gives tax relief for contributions of up to £215,000 per year is just completely mad.

A lifetime limit of £1.8 million means that the richest one million or so people would be end up owning all quoted shares and all government bonds, and there'd be nothing left for anybody else to invest in. Madness.