The Labour Party has announced its decision to restrict tax relief to 20% for those earning over £150,000 pa. Am I – “bothered?”. “nah!”,
I had a good year in 2012, beat my targets and got a bonus. Rather than pay tax and national insurance , I asked to have my bonus paid into my pensions savings plan as I’m currently projecting a 60% pay-cut from my 65th birthday and will need money more now than then.
Would I have done this if I hadn’t been a higher rate tax-payer? Well frankly if I hadn’t earned the money to pay the tax, I wouldn’t have had the money to save so one answer is “no”.
But a more difficult question is whether I could have put the money into an ISA as Michael Johnson would have wanted me to (see wp.me/ppXQz-2pi ).
Michael would argue that higher rate tax relief (and an NI rebate) on the sacrifice influenced me towards pensions. It probably did have an influence but when I think about what drove me to defer gratification I think I was more driven by other factors
- I was scared by the experiences of others who I have seen struggle to do simple things like buy Christmas presents when they get into their 70s
- I am determined to become self-sufficient in my old age and not a burden on my family
- I know that the cost of self sufficiency is measured in hundreds not tens of thousands of pounds.
I actually don’t mind paying tax, it’s what you do to put something back and even if you don’t use hospitals or schools (as I don’t), I get more than my fair shares of much of what the State offers.
If the amount of tax-relief I got (and I am a higher rate tax payer) was reduced to 20% , I would not saving for my retirement. I would actually increase the amount I saved to negate the falling tax-subsidy.
Those behavioural studies that have been carried out looking at the effect of tax relief on lower earners (Jupp and Bee; Savings Sense 1997), conclude that tax-relief is of minimal importance to non-tax payers and of only marginal importance who pay tax at basic rates.
Indeed if I was a basic rate or nil rate tax-payer and found myself enrolled in a workplace savings plan, I would see the reduction of tax-relief for those earning more than £150,000 as at worst an irrelevence.
Arguments about tax-relief tend to be between higher-rate tax payers, particularly those for whom tax is part of their livelihood – tax lawyers, tax accountants and that amorphous hub of people who refer to themselves as financial advisers.
Now that the Labour party has stated its intention to abolish higher rate tax relief for those earning more than £150,000, the recriminations will start to fly. The traditional argument put forward by industry groups such as the NAPF and the PMI is that this measure would alienate the decision makers on pensions from supporting pension provision from staff. But this argument has been seriously diluted as auto-enrolment has taken that decision from them.
I suspect that Labour know that they are on firm ground. The more we move towards compulsory pensions, the less we need tax incentives… and the more we target pension policies at the “have nots”, the less we need tax relief.
But there’s a much deeper inventive to save for retirement.
It’s based on need and not greed.
While Montgomery Burns may make “in greed we trust” his personal motto, for most of us the pensions motto is “in need we must” and the must is “save” – higher rate tax relief or no higher rate tax relief
Despite being part of the ‘amorphous hub’ I agree with you, for the vast majority the change would make absolutely no difference. The far greater issue is apathy, eg ‘it’ll be alright’ which auto-enrolment will go some way to solving.
From a selfish point of view I would be opposed to the change as the small percentage it would affect are my typical client base. Take the example of a small business earner – they are likely to have earned very little and contributed nothing to their pension for many years as they built the business. The end result (hopefully) is that they are eventually able to make significant contributions and draw a high salary/dividends. This type of change (as well as reductions in the annual allowance) penalise this type of person and in my opinion are mainly politically driven – pick on the fat cats, they can afford it. But average salary/earnings/pension contributions out over the years and they are certainly not ‘fat cats’ just hard working people who reap the reward of 20-30 years’ hard work in the last few years.
As you point out, self sufficiency in retirement now takes hundeds of thousands if not more and that becomes very hard (if not impossible) to accumulate over a few years with no higher rate tax relief and £40k per annum limits.
Isn’t the issue here one of double taxation ? We have the ongoing confusion of pensions not being tax relief but tax deferment ( effectively pensions are structured so that earnings are treated as if they were paid in retirement not in year of earning : this has always seemed quite equitable and reasonable to me).
I consider Steve Bee the most definite pensionsguru on these areas. He’s written much the rational for EET on this including http://citywire.co.uk/money/steve-bee-why-es-are-good-and-ts-are-bad-for-pensions/a386092 , you can also look for his cartoon as well.
So I’m happy to be corrected but I would see the effects as twofold :
– On highest earning bracket : Pensions become tax disadvantaged vehicle. If you allow for the tax free lump sum, and 40% retirement tax then the rate is 47.5% which might be ok. but it may be imprudent to assume the lump sum survives which would make the effective rate 55% which is probably prohibitive. It would thus effectively close pensions to higher rate earners…which may be the intent but then this should be stated !
– Effectively this is “borrowing” from future tax revenues. By forcing the payment now, of tax that would otherwise be paid later, this could be agued as a form of borrowing against future revenues and those revenues may be better preserved for when the heath and care bills come in for that generations retirement.
Interested in further thoughts or if I’m flawed in this analysis.
I don’t agree with the analysis.
There was a good comment on one thread which stated that 1 for 1 matching from the taxpayer was untebable and though it drops to 0.9 for 1 when we dip to 45%, the Annnual Allowance has become a pretty decent tax avoidance loophole.
There’s still a few years for you tax planning folk to get your customers a belly full of pension contributions, especially if you are using carry back, but with the semi compulsory nature of AE, the trend has got to be away from tax incentivisation and towards a more general subsidy-not least the £300m and growing, we have paid and aren’t likely to see back -from NEST!
Sorry Henry, i would be v interested in the answer because it may be winding me up unnecessarily.
My approach had been:
100 earnings ….45% tax 20% tax credit : 75 pension
75 pension less tax at 40% … 45 p : ie tax rate 55%
( if 25% tax free .. Then 56.25 tax 40 % + 18.75 p = 52.5p ie 47.5% tax)
And for pull forward, you give up on pensions making tax of 45 now, nothing later vs 40 later with nothing now. Yes slight downward but as said reflected circumstances at that time.
Where am i going wrong?
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