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