One mantra that the subsidy junkies we refer to as 'the pensions industry' have fobbed people off with over the years, and which is mindlessly trotted out by otherwise intelligent people is that "... tax breaks are there to provide incentives to save and so avoid the welfare system in retirement."*
Right. State Pensions and the Pensions Credit and all the other bits and pieces are worth around £75 billion per annum to the recipients**, and cost the taxpayer £75 billion plus admin costs. So purchasing power is being transferred from one group of households to another; or more to the point, this is like a compulsory savings scheme for working age people - they get most of it back in retirement.
Next. Private and private-sector occupational pensions.
1. The total contributions made by individuals and private employers £63 billion (HMRC Tables 7.4 £16 billion, 7.5 £4 billion and 7.9 £43 billion, i.e. £17.5 billion x 71/29)
2. Total value/cost of tax reliefs £47 billion in 2007-08 (HMRC Tables 1.5 and 7.9)
So that's over £110 billion a year going in.
3. Total private and private occupational pensions paid out £58 billion in 2005/06 (PPI Pension Facts, Tables 15 and 16). Let's up that by 10% for inflation and knock off 20% for public sector pensions = £51 billion.
So where does the other £59 billion go? (£110 billion minus £51 billion). Is it being used to build up pension funds? Maybe, but the funds' investment advisors must be pretty crap as total funds are going down in value.
Or is it being soaked up by the 'pensions industry' in fees, commissions and charges?
So shouldn't the mantra be "... tax breaks are there to provide incentives for the 'pensions industry' to sell pension policies"?
* Kay Tie, Comment 4 here.
** Of course, the first thing a simplification campaigner does is to look up the number of people aged 65 or over in the UK, about 10 million, whip out his calculator and work out that this would pay for a handsome Citizen's Pension of £145 per week, but that's another topic.
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9 comments:
I'd always understood that one of the reasons it was tax free was because it was a deferred salary ie taxed as income when paid as a pension.
The great simpleton has it spot on. The "tax breaks" on pension contributions are really a promise by the government to only tax that income once, which isn't much of a tax break...
You say 'reason', I say 'excuse'. Where does that £59 billion go, that's what I want to know.
Yes, I used to believe that, too; it's even possible, I suppose, that the people who put the framework in place actually believed it at some point of their deliberations.
The problem is that the whole industry has become distorted because tax reliefs are available at the top marginal rate. If you have lots of disposable income (let's say, for instance, you're a politician or tax consultant) than you can reduce your tax bill by saving maximally into your pension. Better, the standard-rate proles will be paying you to do it! The proof of this (for me) as a distorting factor lies in the comparison between the average private sector pension fund (£25,000) and the way the Government a few years ago introduced a lifetime contribution cap of £1.5m.
The original logic may have had its place but given the lovely ripe juicy fruit on low-hanging branches available to the pensions industry, the logic needs reviewing in the light of experience.
Everyome "knows" pensions investment should be cautious, safe, proof against fluctuation, right? So bonds, gilts, "with profits" funds where returns are low and reasonably assured. And for little-to-no fund management in a large proportion of all pensions funds invested, the industry can take massive rewards as "charges". Up front, too.
The distortion must be removed to restore any sort of equity (no, equity, not shares) into a discredited and largely corrupt system.
FT, "the logic needs reviewing in the light of experience"
Exactly! That's my whole political philosophy in a nutshell! Would you accept the post of Pensions Reform Minister in the MW cabinet?
Sir, it would be an honour, and a challenge I'd be delighted to accept (cont. p94)......
A large, double-headed axe of astonishing sharpness, a chainsaw, and several blades that if on the street would see me in prison for life, await; and that's just for HMRC.
In such circumstances, I might just be the first ever member of a cabinet who saw his primary duty as making himself redundant in the shortest reasonable time.
It'll be a race between you and the Minister-for-shutting-down-DBERR-and-Regional-Development-Agencies.
Mark,
I didn't say I necessarily agreed with the reasoning, just that is what I understood. I don't mind how we deal with pension savings as long as they aren't double taxed, as normal savings are.
I do presume you want to encourage people to save for the old age?
GS, 'normal savings' are NOT double-taxed. It is the income on savings that is taxed! If you withdraw the capital, that is NOT taxed (quite rightly so, as you save out of net income). Unlike pensions - you get relief for the capital you pay in, but the capital element of your pension fund is taxed when you draw down on it.
Anyway, it is not the business of gummint to ENCOURAGE anything. It should ENABLE people to do what they want. If we took that £47 bn (or £59 billion, or whatever the figure is) and used it to fund massive tax cuts (e.g. £12,000 personal allowance and 25% flat tax on all income), we'd all have more net income to spend, save or invest as we pleased.
The better off/sensible people would put some away for old age; the poor/reckless wouldn't. But they'd ALL have a Citizen's Pension of £130 per week to fall back on. And if you have savings on top - good for you!
What can possibly go wrong?
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