2016 – Time for some pension warming!


My pension – a big splodge of cash!

Today is the last business day before Christmas, and if you’re reading this you are either scything off work or bored with your holiday freedoms. If you have any more time, have a read of John Kaye’s wonderful Christmas blog in the FT  in which he argues that the more rules you make, the less you need to waste time puzzling over right and wrong.

Kaye evokes the ghosts of the Cambridge classical scholar, FM Cornford who published Microcosmographia Academica and  the precursor to the CIA that published the Simple Sabotage Field Manual to show how serial filibustering, pedantry and the liberal use of commas can turn a moral debate into bureaucratic stagnation.

“Bureaucratic stagnation” is a phrase I’d apply to the state of pension taxation right now. It has become so pedantic, complex and full of commas that we can hardly move for the possibility of unforeseen consequences.

But worse, much worse than the stagnation, is that we are stuck in treacle that ensures that pensions make the rich richer and keep the poor in poverty. To use one of Michael Johnson’s favorite phrases, pension taxation is fundamentally regressive and leads us back to a world where for the poor retirement is nasty, brutish and short.

Here is the view of an economist I very much admire

It’s not just the 25% tax free lump sum…the following are examples of why tax relief is not revenue neutral. 

Higher rate taxpayers comprise around 10-15% of all taxpayers and get higher rate relief on their entire pension contribution in most cases.  Only around 2% of pensioners pay higher rate tax when they retire, and only on the top slice of their income.  That alone cannot be fiscally neutral.

Tax rates have fallen significantly over the years, so again relief was given at far higher rates than the tax paid on withdrawal.

QROPS is another area of leakage – HMRC often don’t recover any tax and those schemes are becoming tougher to obtain but will only be used by higher earners of course.

These are examples, doesn’t take a rocket scientist to spot the tax leakage – but of course that still doesn’t necessarily  mean the system has to be changed, that is a judgment that must be made.

The final point is telling. Just because tax leaks to the rich, doesn’t mean that tax policy is wrong. It depends where you set your moral compass.

The moral compass of the pension industry is set against tax reform in April. Ideally we would continue with the current status quo- including the ridiculous incompatibility of net pay and relief at source as it is working very well – so long as you are wealthy (particularly if you make your money managing wealth).

The argument goes that if you cut off tax relief – especially higher rate tax relief- you cut off the oxygen supply for saving. This argument ignores the fact that most ordinary people now save into ISAs where there is no tax relief on contributions.

These comments are from Johnson’s April paper “Time for TEE”

Over the last six years, stocks and shares ISA subscriptions have increased by 90%, to £18.4 billion in 2013-14, taking the total market value to £241 billion.2 In the same year, an additional £38.8 billion was subscribed to 10.5 million cash ISA accounts, taking the ISA cash mountain to £228 billion. Clearly, engagement with ISAs is high, confirmed by industry surveys, and acknowledged by the Chancellor when he raised the annual subscription limit by 30%, to £15,000, in the 2014 Budget. Importantly, the ISA brand is still reasonably trusted.

Conversely, over the same period, the amount contributed to the EET world of private pensions reduced by 25%, to £7.7 billion in 2013-14, a figure which includes basic rate tax relief.3 Official data excludes SIPPs and SSASs, which attracted perhaps another £6 billion

Since the outcomes of ISAs and pensions are increasingly the same- a big splodge of cash, it is curious that the wealthy need their own way of getting there.

To return to Kaye’s argument, pension tax relief legislation is not about right or wrong, it is about making sure that nothing changes. The moral compass is set at true north- towards the barren tundra where permafrost persists ad infinitum,

My hope is for some “pension warming”. I want to see a Narnia like revelation next April where the icy grip of winter is broken, snow falls from the tree and spring returns. I don’t expect to see it all happen in 2016, or in 2017 for that matter. I don’t expect to see a fair pension taxation system implemented till 2019 – because it takes a long time to thaw permafrost from the ground, it takes a long time to scrap that many rules, it takes a long time to change processes and systems.

It’s been a long time coming – but change is going to come

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to 2016 – Time for some pension warming!

  1. Michelle Cracknell says:

    Thank you Henry for all your blogs. You are a wonderful and prolific blogger and a great read to start the day. Sometimes amusing, sometimes blunt, often contrarian but always thought provoking.

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