From The Daily Telegraph*:
Discussions have begun at the Treasury over the move which would see the axing of tax relief currently paid out on pension contributions by people who pay income tax at the higher rates of 40 per cent and 50 per cent. The money saved could go towards cutting the budget deficit or – in what would be a more politically popular decision – be used to provide a significant increase to the value of the basic state pension...
Some Conservative MPs expect the axing of higher-rate relief to be merely the first stage in a more extensive and radical plan which would end up with all tax relief – including on contributions made by people paying the basic 20p rate of income tax – being abolished, saving £22 billion a year in total. Such raids, which could be announced in next year’s Budget, would be greeted with howls of protest by the pensions industry.
However, experts estimate that abolition of all tax relief on pension contributions – except employer rebates which would be likely to be retained – could be used to boost the value of the basic state pension by up to half.
OK, how about this for a plan?
It's not £22 billion, for a start. HMRC's Table 1.5 gives the total cost of income tax relief for pensions contributions and tax exemptions for pension funds as £20.3 billion and relief from Employer's NIC as £7.9 billion. Contracted-out rebates cost £9.5 billion. There's no figure for the 'cost' of relief from Employee's NIC, so let's guess another £6 billion for that, total £43.7 billion.
Let's then split that £43.7 billion into four chunks of £11 billion and see what we could do:
a) Increase the proposed Citizen's Pension by £20 a week.
b) Reduce Employer's NIC's from 12.8% of wages to 10%. Even better, scrap the lower threshold and apply a flat rate of 7% or 8% to all wages.
c) HMRC's Table 1.6 tells us that getting rid of the 50% additional rate tax would cost £0.7 billion, and reducing higher rate tax from 40% to 20% (i.e. scrapping higher rate tax) would cost £12.6 billion, but let's factor in some Laffer effects and call it £11 billion as well.
d) Increase the income-tax personal allowance and Employee's NIC threshold by £1,500 a year.
What can possibly go wrong?
* Spotter's Badge MBK.
Sunday, 19 June 2011
If you're going to reform pensions, why not go the whole hog?
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15 comments:
It's not £22 billion, for a start. HMRC's Table 1.5 gives the total cost of income tax relief for pensions contributions and tax exemptions for pension funds as £20.3 billion and relief from Employer's NIC as £7.9 billion.
Howzabout not charging such tax in the first place?
Do you want people to throw themselves on the mercy of present and all future governments, or make provision for themselves?
JH, that's the general idea.
S, it would be far better if people made provision for themselves, which is why I allocated three quarters of the value of the reliefs to tax reductions. A few general observations for you:
1. The bulk of the value of the tax breaks is soaked up by the pensions and insurance companies anyway.
2. Even if that weren't true, about half the value of the tax breaks goes to the top ten per cent of earners, who'd be able to save up anyway, esp. if higher rate tax were scrapped.
3. The main asset of pension funds is shares in UK plc's, so this reduces the number of small, direct shareholders who would be much better at keeping the management in check.
4. The safest and hence best thing to do with your money is to pay off your mortgage ASAP. Once you've done that and want to start saving properly, if you own cash and shares directly, you will watch over it much more carefully than if you just get meaningless statements from a faceless insurance company once a year.
5. Owning cash and shares directly gives you much more flexibility in later life.
6. There simply aren't enough investment-grade assets in the UK to be able to provide all retirees with a pension of more than £5,000 or something, so the whole pensions saving thing is a futile exercise and merely serves to drive up the price of shares.
7. And so on and so forth.
1. Not since stakeholder pensions, and even less so when NEST comes in; and funded public sectyor pensions like Local Govt SS even cheaper.
2. Relief for the very high earners to be severely capped. "The Chancellor has announced that, starting in 2011-12, tax relief on pension contributions will be restricted to basic rate for individuals with an annual income of £150,000 or higher." http://www.hmrc.gov.uk/budget2009/tax-relief-pen-cont.htm
3. Not if I advise the client; and shares tend to be held via collective investments anyway, whether within or outside pensions, that's another can of worms.
4. That's my attitude too, but depends on attitude to risk, interest rates and level of tax relief. Be even better if we'd severely restricted mortgage loans anyway, but now we're stuck up that tree. All that money sunk into illiquid, unproductive assets.
5. Yes, for basic rate taxpayers I go through a spiel on pensions v ISAs on the lines you suggest.
6. Many people won't even have that because they don't save anyway. A lot depends on the ratio of investors to those drawing down. And it doesn't all have to be in UK assets, again.
7. This could go on and on. But I'd like to see NIC and income tax merged, then ordinary earners could get 40% relief. But they won't, because the PTB will make sure you never win - Japanese saying, "Always give them fish soup, never the fish". Anytime there's a change look for a further official scam, now my attitude is don't rock the boat.
S.
1. Maybe, in which case all the money the pensions people invest merely drives up the price of that small pool of assets in which they invest (shares, bonds).
2. Yes I know that, so why not go the whole hog?
3. Let's get rid of the whole collective can of worms while we're at it.
4. Agreed.
5. Exactly. In practice, basic rate taxpayers pay neither income tax nor CGT on the shares they own - even outside an ISA. As my plan is to get rid of higher rate tax, we wouldn't even need ISAs.
6. OK, but most people across the Western world are supposed to be saving for their retirement, the world wide pool is limited in exactly the same manner.
7. Merging income and NI into a flat tax is another good idea, beyond the scope of this discussion.
The accountancy industry have a lot to thank for the government for, you earn the money, have it taxed away, then handed back via pension relief, then taxed away again when your pension finally kicks in.
It's total madness, I really don't know why the population put up with it.
CD; "I really don't know why the population put up with it."
It's easy, you start off with a nice big fat lie which has no basis in logic or maths but some emotional appeal for people with nannying instincts, like "The government should encourage people to save for their retirement" and then you busk it from there.
See also: "Rising house prices make us richer", "Local services are paid for out of council tax", "Britain must have an army that enables it to play a big role in world affairs" etc etc.
It all goes back to the housing market imo, once man has been robbed of the ability to provide for himself the only way to get by is to engage in a bit of special pleading, this paves the way for 'caring' socialists with nannying instincts.
It's no coincidence that Labour strongholds happen to be in areas with reduced economic surpluses, it's just a pity that Labour's founding fathers were unable to scratch the surface and identify the real source of their problem.
Incidentally PricedOut have just emailed me asking if I would like to meet Labour's housing team in London to discuss housing issues, I'm quite tempted, but not sure if I can make it.
CD, reply to PricedOut and suggest me as your substitute.
Done.
The whole 'deferred pay' concept of pensions has become, over the years, utterly bastardised.
In a sense, if you are going to tax pensions annuities (as in the income you get) as pay rather than as ordinary purchased life annuities are taxed on the interest component only, then it is logical not to tax the pension savings in the accumulation phase.
But, only private pensioners buy annuities, all the state schemes and other large employers schemes pay pensions from cashflow and possibly the fund (eat your herat out Mr Ponzi).
Furthermore the reason people don't save is that they know that there is no need to, as everyone else will pick up the tab for them in the future. That's entirely logical result of the welfare state.
So, as the Irish say, I want to reform this system, but I wouldn't start from here...
What tax relief? If I put some of my money into a pension scheme, the pension I get will be taxed. If you remove tax relief from pension saving, you would need to stop taxing pensions. (If you don't, then everyone would use other savings vehicles instead, but the result would be the same.)
Therefore, scrapping the tax relief would NOT provide any more money for anything.
AC, you ask "what tax relief?"
Er, the tax relief which nominally accrues to pension savers but actually gets largely creamed off by pension salesmen, actuaries, lawyers, advisors, trustees, accountants, insurance companies, annuity providers Uncle Bob Maxwell and all.
"If you remove tax relief from pension saving, you would need to stop taxing pensions."
Well yes of course, I would have thought that was implicit?
Although there would have to be a rough and ready calculation of by how much a pension fund has been boosted by tax relief in the past (if the saver then wants to claim it back from the actual beneficiaries - see list above -well good luck to him), and that fraction would have to be clawed back somehow or other in future.
I.e. a pension already in payment would continue to be taxed at current rates and somebody who starts saving tomorrow would only be taxed on the income element of the fund as it arises and not on the capital repayments when he retires.
Therefore, scrapping the tax relief would NOT provide any more money for anything.
Over the long term yes, but it would provide more money now, which is all the government cares about.
Ed, the measures I outlined would enable the govt to make massive tax cuts today, in theory, they will one day be losing £20 bn a year (or whatever) tax on pension income, but the Laffer boost from cutting taxes now will far outweigh any other considerations - chances are that income tax receipts under my proposal would be higher in twenty years time than they will be if we stick with the present shite.
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