5 Responses to Need or greed? – how fragile the case for pension tax relief

  1. 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.

  2. Nick says:

    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.

  3. henry tapper says:

    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!

  4. Nick says:

    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?

  5. Pingback: Savers put themselves first! | The Vision of the Pension Plowman

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