I had a most interesting telephone call yesterday evening, the result of which was this:
While I agree with Lord Hutton's suggestions on reducing the generosity of public sector pensions, I note from your article (Thursday 7 October) that the total cost of these pensions before deducting income tax is £32 billion a year, which is rather less than the total cost of all the tax reliefs for pension contributions minus income tax collected from pensions in payment of £38 billion or the total cost of the State Pension and other old-age related benefits of £84 billion.
It should be noted that the bulk of the tax reliefs accrue to the wealthiest of higher rate taxpayers, who under Labour's reforms could claim full income tax relief on lifetime contributions of up to £1.8 million.
The Tories have summoned the courage to restrict Child Benefit received by higher rate taxpayers, so let us hope that they also go ahead with their plans to reduce the maximum annual contributions on which tax relief can be claimed from £255,000 to £40,000.
Below, the paper copy in all its smudged glory:
Friday, 8 October 2010
The Evening Standard printed my letter this time.
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15 comments:
It won't wash, Mark. The whole point about the child benefit cut was that it was fiddling small change to the Really Rich, whilst being a handy political gesture. Your proposals would actually hurt the RRs and so would contravene the Golden Rule - He who has the gold, makes the rules.
B, of course the Child Benefit cut was nonsense, goes against all my principles, but the letter was written in the context of the telephone conversation.
Good letter, MW.
How long before Demos pick up on that and present it as their own? ;)
DP: "How long before Demos pick up on that and present it as their own?"
Funny you should mention that. My big task for tomorrow is pointing out a document which might have served as a template for John Hutton's pension reform ideas...
Your letter does make some pretty telling points.
However, if you restrict tax relief on contributions you would need to change the tax treatment of pensions in payment. Part of those pension payments are return of the capital invested, after all. If you tax that then you are distorting the market in favour of other investment options and against pension schemes. That would be as baad as the current system where the market is distorted the other way.
AC: "However, if you restrict tax relief on contributions you would need to change the tax treatment of pensions in payment."
Oh yes, of course, but the point of the letter was just to put it all in perspective.
The real significance of £38 billion is
a) it is more than enough to get rid of higher rate + additional rate income tax and lift the personal allowance to £10,000
b) where does that money go? It is not added to private pensions in payment, which are only about £40 billion a year net.
Most of that money is swallowed up in fees by the Pensions industry.
It's not even a scam, most of the costs are complying with the onerous regulation.
IMHO an E-SIPP investing in tracker shares is the best.
AC1: "Most of that money is swallowed up in fees by the Pensions industry."
Yes of course. Simple maths says total contributions > £50 bn a year attracting £50 bn tax relief (marginal tax relief in order of 40% or 50%).
Official stat's say private pensions in payment approx. £50 bn (minus £10 bn income tax deducted).
So that's £100 bn a year in and £40 bn a year out. Oooh, I wonder where the missing £60 bn goes..?
The 'costs' of £60 bn of which you speak are NOT an unfortunate side-effectof complicated legislation - THEY ARE THE WHOLE POINT!
That is the only reason why we have these tax breaks, it is to generate £60 bn a year in commissions, fees, charges, percentages and other choice cuts for the quangocrats and lawyers, accountants, financiers and paper pushers.
E-SIPP also load of shit. Cash in the bank or direct investment is best.
an E-Sipp is a direct investment.
AC1, sure. It's a direct investment. With all sorts of costs and rules and extra subsidies and taxes attached. The overall allocation of capital is thus sub-optimal.
"...let us hope that they also go ahead with their plans to reduce the maximum annual contributions on which tax relief can be claimed from £255,000 to £40,000."
I did a little looking at the proposals a few months ago. The way it has thus far been put forward would not be good. For members with a Final Salary pension and long service, it wouldn't take a lot to give them a massive tax bill (e.g. member with 30 years service, salary increases from £20k to £25k over the year, tax bill of £7,333.33).
Additionally, they were proposing keeping the Lifetime Allowance alongside this annual allowance. That would potentially lead to marginal tax rates of up to 74% or 78% (depending on how they calculate the tax - it's not entirely clear) - which would be a big disincentive.
I've always been of the opinion that Tax Relief on pensions investment was simply a way of formalising the benefits as deferred income. The money that you receive from a pension is taxed, so why do you need to tax it when you put it in? There's also the fact that a lot of schemes cost the companies running them a lot of money, but the directors and managers get a nice pension out of it so keep it going. This has the added benefit the general staff also get a reasonable pension. Cut the benefits to higher earners and I suspect you'll see a lot more schemes being shut down as the managers and directors no longer see the point.
(disclaimer: I work in the pensions industry)
RA: "disclaimer: I work in the pensions industry"
Perhaps you could explain to us what happens to the missing £60 billion a year that goes into the private pensions system but never reappears?
I did put forth a suggestion on an alternate way to value the benefits, incidentally. We'll have to see what they do with it...
"Perhaps you could explain to us what happens to the missing £60 billion a year that goes into the private pensions system but never reappears?"
First of all, given that people are saving for retirement, and that there are more people working now than in retirement, I'd expect to see more paid in than out.
We may be working from different figures here (or I may have things completely wrong) but I get total contributions to non-state pension schemes of £82.1bn for 2008 (latest figures I can see - from here - page 3)
Tax relief on contributions for 2008/2009 is apparently: £21.3bn excluding the income tax (from here - page 10)
So we have a total of over £100bn, as you have said. Less the £50bn paid out, that leaves ~£50bn going into the schemes each year.
The Pension Protection Fund produces a report each month called the 7800 report. It tracks the funding position of each defined benefit (DB) scheme in the UK (and the latest is here). They show that over the last year, the total assets of all DB schemes increased by £77.5bn. This takes into account only the DB schemes, and the position varies a lot depending on when you look at it (Jan 08 to Jan 09 shows a big decrease in assets, for example, but overall it's trending upwards, showing a total increase of 67% from March 2003 to August 2010 - about 7% per year, which is about £65bn based on the latest figures) but it hopefully goes some way towards explaining where the money is.
That's not to say that there aren't significant charges imposed by the pensions companies. I know that my time is charged out at about £120 per hour (which I see very little of), but the amount of work that I do on a scheme works out to so little per member that the total cost is fairly minor.
RA, good stats. The 81 billion contibutions is gross including tax relief. Your source just mentions income tax relief and ignores National Insurance reliefs and rebates, which brings the total net relief to 38 billion (as per HMRC table 1.5).
So in round figures, net cash contributions are 40 billion every year as against net pensions paid out 40 billion after income tax - so it is a zero sum game for the 'pensions saver', which also means that the entire value of the tax breaks 'goes missing' (whether it's 40 billion or 60 billion that goes missing is a separate debate, it may be the lower figure).
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