Mombers, in the comments to Lola's recent post about pensions and savings:
"Surely the purpose of any incentives is to provide enough private income to prevent OAPs becoming a burden on the state? If so, it doesn't matter what the person's income in their working life was. That said, I am a bit miffed that my enormous tax relief is all but certain to be cut :-("
My response, as tidied up:
M, yes that is how they always justify it but it is complete and utter horseshit.
Cost to the taxpayer of basic state pension = £50 billion a year.
Cost to the taxpayer of second state pension = £40 billion.
Cost to the taxpayer of top-up payments of Pensions Credit, Housing Benefit and Council Tax Benefit for pensioners with no SSP or private pension = approx. £15 billion.
Cost/value of pensions tax breaks = £40 billion.
Of necessity, a lower tax burden on income channelled into private pensions = higher tax rates on everybody/everything else.
Number of pensioners currently NOT claiming top up benefits who would be claiming them if it hadn't been for pensions tax breaks = very, very few indeed.
Saving to the taxpayer from not having to support these very, very few pensioners = a very, very small amount.
So they are spending/overtaxing by £40 billion a year to save the self-same taxpayer £5 or £10 billion at most.
That is fucking awful value for money, targeted at the wrong people and imposing higher tax rates on everybody/everything else.
Sunday, 14 February 2016
Economic Myths: Tax breaks for pensions reduce the burden on the taxpayer.
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13 comments:
My point was that tax relief should be limited to an amount that can provide a subsistence income in retirement. It doesn't achieve anything to subsidise a pot that is bigger than required to provide subsistence.
M, that's fine in principle, but the state pension plus pensions credits already provides a subsistence income.
That's £ in tax paid reducing pensioner poverty by £, fair value for money.
Levying £40 bn in tax in order to reduce pensioner poverty by £5 or £10 bn is idiotic.
Wouldn't the Treasury save more money by increasing the tax on the pensions produced by the pension industry and maintaining the tax relief on the payments made to the pension industry. ie taxing from a larger sum rather than taxing from a smaller sum.
Whilst I agree with MW in navy ways we need to understand the pension 'contract'. Pensions are deferred pay. The deal is that you defer spending income now and it won't be taxed until you draw it. This is why pension annuities are taxed on the whole payment as opposed to just the interest component like purchased life annuities. This IMHO is right and proper. I also agree that there should be a lifetime allowance, currently £1m ish. Trouble is because of the margin creep many more people pay IT at 40% nowadays. Therefore to cap the pensions tax relief better to raise the HR tax threshold.
"So they are spending/overtaxing by £40 billion a year to save the self-same taxpayer £5 or £10 billion at most."
Well even if you take your figure of £15bn from higher up, then there is still £25bn more going in tax rebates than necessary. However, a cynic like me doesn't have to look very hard to realise why. Where does this £25bn end up? in the pockets of the pensions industry and rich pensioners who were never going to be a burden on the state anyway.
If I was in charge, I'd abolish the whole idea of tax rebates on payments and make pension income tax free instead.
Din, that doesn't really make sense.
L, "Therefore to cap the pensions tax relief better to raise the HR tax threshold"
Yes, that would be a sensible thing to do.
B: "Where does this £25bn end up? in the pockets of the pensions industry and rich pensioners who were never going to be a burden on the state anyway."
Yes, I have said before as well. Even the Daily Mail has pointed that out.
"Yes, I have said before as well."
Yup, this blog is where I learnt that from. I should acknowledge my sources... However, it can't be said too often, IMHO.
> MW
Don't you think The pensions industry makes a positive return on the money payed into it.
20:11 continued
and therefore letting an investment grow before taxing it garners a greater sum.
Din: "Don't you think The pensions industry makes a positive return on the money paid into it and therefore letting an investment grow before taxing it garners a greater sum.
Yes, of course they do make positive returns, same as anybody else, they are not completely inept. But they soak up a chunk of those returns in fees and charges, so that the value of the tax breaks is cancelled out by the fees and charges.
It's called tax arbitrage, the same as banks paying lower interest rates on tax free ISA or PEP accounts.
MW / Din
Pensions fees and charges.
As you know I am involved in this business.
If I charge a client a £1 I get?
Tax freedom day - Late May/early June = 45% approx.
So I get £0.55p. No.
Direct imprests and dead weight costs of regulationism ~15% (me) to 30% ( a bank I spoke to). Average 22.5%.
So of every £1.00 I charge I get ~32.5p and the gummint get 67.5p.
So who is the cost problem?
I take all of the points above but... I would add that the more pension funding that is derived from defined contribution rather than defined benefit, the better. It is an absolute nonsense that I'll get anything 'back' from my NI contributions by way of a state pension - the money is spent and there are not going to be enough working people to pay into the Ponzi scheme when I'm old. Much of the £40bn is wasted for sure, but I don't see people saving without incentives. Limiting it to basic rate would save a lot of money. Also equalising the treatment of defined benefit and defined contribution tax relief would help. Currently you get hit by the (already flawed) lifetime allowance on a much smaller DC pot than defined benefit.
Bayard, a move to taxed on the way in, tax free on the way out could be dangerous. This opens the door to bigger future tax raids on pensions. It's a lot easier to say 'Solidarity charge of 20% on pension pots' than say taxes on pension withdrawals go up from 20% to 40%. Moneyweek had an interesting article on this, can't find it though :-P
I was going to add that the long term nature of pension savings is good for the economy in that companies have investors who can support them in investing over longer horizons, but then I looked around my office and remembered how fund managers are just as incentivised for the short term as their chums in the companies that they invest in.
"This opens the door to bigger future tax raids on pensions."
I'll think you'll find that door is already open. Also, since a pension pot built up with taxed income can only be taxed on the interest/capital gain, without the tax simply being theft (not that that would stop a desperate government; Henry VIII did it and got away with it), I would say that the opportunities for a tax raid are more limited. If there is no incentive to class your savings as "a pension", then no-one will do so.
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