From The FT:
Stuart Drew (Letters, March 27 and 30) originally claimed that "HM Revenue & Customs gives tax relief when pensions contributions are made and allows funds to grow tax-free but recovers the revenue foregone by levying income tax on the stream of payments made when the pension capital is eventually withdrawn".
This sounds very fair in principle, but the truth of the matter is that the total value of tax and National Insurance reliefs for pension savings is in the order of £50 billion a year and the income tax "recovered" from pensions in payment is slightly less than £10 billion a year.
Even if his claim were correct, this is no justification for allowing a quarter of the final fund to be taken tax-free. This would only be justified if the tax and National Insurance burden on pensions in payment were higher than the rates on normal earned income, which by his own admission they clearly are not.
And if it really were the case that those who save for their retirement out of post-tax income are at an advantage to those contributing to an approved pension scheme, then there would be no need to have a special regime of tax incentives for retirement savings - because people would and could just save out of their post-tax income anyway.
Mark Wadsworth etc.
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2 hours ago
5 comments:
Somewhat different, I know - and let's leave aside the wider arguments about tax relief - but there is also no justification whatever for giving tax relief at the highest marginal rate on 100% of an individual's pension contributions.
It's absurd that a 40% taxpayer pays 40% on the top slice but gets 40% relief on all contributions. Even more absurd with the 50% (or 45%) band. I accept it's simpler than trying to apportion it according to the proportions of salary paid in different marginal rate bands but this should be a matter of principle; I'm not trying to do a time & motion study.
FT, which is all an argument for having a flat income tax rate (the lower the better, separate topic). Or at least, align the rate used for tax relief for contributions with the typical rate on pensions in payment.
"but there is also no justification whatever for giving tax relief at the highest marginal rate on 100% of an individual's pension contributions."
It's a hidden tax break for the rich and influential; what better justification could there be?
"This sounds very fair in principle, but the truth of the matter is that the total value of tax and National Insurance reliefs for pension savings is in the order of £50 billion a year and the income tax "recovered" from pensions in payment is slightly less than £10 billion a year."
What are the yearly gross figures for the amounts actually being saved into pension schemes and the amount of pension being _paid_ from such funds (however vested - drawdown/annuity/whatever.
PJH, I did a post about that, Lapsed Agnostic pointed out some mistakes I made in the comments, the position isn't entirely clear.
But broadly speaking, the net amount paid in is about the same as the net amount paid out, and the pensions 'industry' gets to keep three-quarters of the value of the tax breaks.
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