I've had a few comments to an earlier post (which touched upon the hypocrisy of George Osborne in mentioning 'Gordon Brown's pension raid' for the zillionth time, while in the same speech saying that some of the interest income that pensions funds receive, which is currently entirely tax-free, should be subject to corporation tax) from people who still fall for The Big Fat Lies that:
a) It is any business of the government to arrange transfers via the tax system from non-pension savers to pension savers;
b) The value of the tax breaks actually accrue to those who have saved into pensions, rather then being creamed off by the 'pensions industry';
c) That the benefit of encouraging those with more-spare-income-than-sense to invest in these schemes outweighs the deadweight costs of the higher tax burden on those with less spare income (or more sense).
But even if all the practical problems could be overcome, and everybody paid as much of their current income into a pension scheme as they could, in order to minimise the tax they pay, what happens then? Interestingly, Dearieme himself answered this point in the comments to one of Alice Cook's posts on the fall in mortgage-equity-withdrawal a few weeks ago:
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"Homeowners, who are mostly middle aged, borrowed and spent, based on the illusion that they were rich because house prices were inflating"?
No, I just borrowed and spent because I had education costs to meet and knew that I could pay it back when I got my pension lump sum. What happens to the poor sods whose pensions go bust so that they don't get their lump sums I hate to think.
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OK, the housing boom and mortgage-equity withdrawal is over for the time being, but if people had a straight choice between paying off their mortgage during their working lives (with no tax breaks), or sticking to an interest-only mortgage, and paying into a tax-favoured investment scheme to build up a lump sum to pay off the mortgage when they retire...?
Haven't we tried all this before? Did it work?
Tuesday, 7 April 2009
The futility of tax breaks for pension savings
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11 comments:
What better investment could I make for our old age than ensuring that the nipper got a decent education?
D, that is better dealt with by offering people education vouchers as an alternative to the State education system.
It seems to me that you are in danger of arguing along the lines of "I wouldn't start from here". Very possibly, but "here" is where most of us find ourselves. It's fine for you to say that you want nothing to do with pensions, but my beloved employer promised to pay some 14%-18% of my salary into a fund if only I'd pay in 6%. I found that offer irresistible. Tax breaks too: yipee. Of course I'd rather have had a higher salary and no fannying about, BUT THAT WAS NOT ON OFFER. I agree with you to the extent that I don't think much of pension funds in the abstract - in evidence, I cite the fact that after careful discussion with me, my wife twice took refunds from pension funds when she changed jobs rather than leave her capital to the predations of the fund managers. (Has that been banned now? It worked very well for us.)
D, my employer tries the same soft-soap with me, but I remain steadfast. I prefer the higher salary and no fannying about. That's why I'm slightly wealthier than my colleagues.
Come to think of it, I later withdrew capital from a pension fund too - in Australia. That also worked out well. Bonza!
I'd recommend looking at an E-SIPP.
http://www.moneysavingexpert.com/savings/cheap-sipps
The real problem with the removal of tax credits on pensions was the way it was done.
It was tucked away in the budget detail and took 6 weeks to come to light. It came into immediate effect and was then passed off as a technical change with minimal impact. This didn't give people time to understand the changes and plan for any impact.
Contast this with that other middle class tax subsidy, MIRAS. This was announced in March 1999 and withdrawn in April 2000. It had been slowly eroded over time to the point where the withdrawal was hardly noticed.
That, IMHO, is what really pisses people off.
TGS, and how sneaky is Georgie being about it?
Georgie says he want to do it to 'fund' a cut in corporation tax, and to be fair, The Goblin King removed the tax credit and cut corporation tax from 33% to 30% as one single package.
Where is the difference? Either they are both right or both wrong.
The 'pensions raid' also hit a lot of retired people on modest pensions depending on modest investment portfolios to supplement their income. I have at least three older lady clienst who were hit hard by this. And it also increased the cost of risk capital - equity - whilst at the same time Brown ludicrously reduced the cost of debt capital.
AS regards pensions - I'm with MW. Take the pay now and invest it yourself. Pensions are technically deferred pay, which is why the funds are supposedly tax free and the resulting annuities are taxed as pay on the whole annuity payment rather than just taxed on the interest component for a normal purchase life anuity.
By investing yourself you have full access to your capital at all times. This control in my view is alone enough to pursuade you not to lock up your money into a scheme which is subject to political whim and other debilitating factors, whatever the tax relief.
Of course if you work for the State then get into the pension scheme ASAP. It costs you absolutely nothing - in fact you get eye watering amounts of money thrown at you.
"The real problem with the removal of tax credits on pensions was the way it was done.It was tucked away in the budget detail and took 6 weeks to come to light."
Are you sure about this? The budget was on July 2nd 1997. The Times & Independent ran three articles on the lines of 'last chance to beat the budget' about the expected removal of tax credits on July 1st. On the day after the Budget, the Independent ran 'Pensions blow for Middle England', 'Pensions fund in uproar over removal of credit', while the Times ran 'the pound in your pension fund', 'pension schemes count the cost of Brown's raid'. On July 4th the guardian ran three stories and an article by Vince Cable. I don't have access to the Telegraph's archives but I doubt it missed it either.
Forget pensions and fund managers pockets - put your money into ZOPA.co.uk and get a real return on your investment, one you can count on!
I've been doing it for over 3 years and getting a very nice income from it (ok so you get taxed at the end of the year and you may lose a very small amount to bad debt - I lost £180 in 3 years but thats not bad on £8k pa income on 80k) If I saved the same amount in a bank I would be lucky to get 1k so who's the loser?
AND I can get my hands on the money unlike a pension fund!
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