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As a nation we cannot afford it (as part of a balanced welfare system)
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We are over-incentivising private pensions (compared with similar countries)
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Tax-relief is bloating the wealthy not helping the poor
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The influx of 11m+ new savers into AE (especially in 2018-19) makes things worse
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Tax relief has created systemic inefficiencies in private pensions
I am not calling for the end of pensions, I am calling for root and branch reform of the way Government manages people’s savings behaviours, encourages non-savers into saving and ensures a competitive, saver-focussed pension industry.
If you are short of time, please stop reading and cogitate on this, this blog will still be around when you have time! If you have five minutes, read on!
We can’t afford pensions tax-relief.
This isn’t my thought, nor the Chancellor’s, it’s the conclusion of our Office of Budget Responsibility
the public finances are likely to come under pressure over the longer term, primarily as the result of an ageing population. Under our definition of unchanged policy, the Government would end up having to spend more as a share of national income on age-related items such as pensions and health care, but the same demographic trends would leave government revenues roughly stable.
This is what they have to say about the numbers
Spending excluding debt interest is projected to rise from 33.6 per cent of GDP in 2019-20 to 37.8 per cent of GDP by 2064-65, whilst receipts remain relatively flat (at round 36 per cent of GDP) over the same period
We can’t stand still and stay in the same place. Doing nothing will see a worsening of public finances- meaning less state pension, less welfare , less healthcare. We have got used to telling people to work longer, save harder and invest better. The pension industry seems to think itself as immune from the same changes.
We are out of kilter with the rest of the world
Again, here is the Office of Public Responsibility
Social spending in the UK (relative to OECD) …..is above average when private spending (particularly on pensions) and the net effects of the tax system are taken into account
and it’s the amount we spend on getting people to save for retirement which is singled out
the cost of tax relief for pension contributions,… is also estimated to be relatively high in the UK
Tax relief is bloating the rich, not helping the poor
The PPI reckon that 65% of tax relief is going to the top 10% earners in the UK. Meanwhile, those who pay no tax are missing out (under net pay) on any incentive to save into a pension.
Auto-enrolment makes tax-relief even less sensible
The huge number of basic rate tax-payers being auto-enrolled will put a strain on our finances that cannot be eased by tinkering (moving to a flat rate higher than 20% actually makes the AE tax-bill higher). AE requires that the reform of the incentivisation of retirement savings is radical.
Tax relief has made us soft
The pension industry is in receipt of a £35bn pa tax-payer subsidy, for which the tax-payer is getting appalling value for money. The £35bn , it is argued, props up our wonderful pension saving culture, but pension savings have been falling for years and it is only auto-enrolment that has arrested that decline. Auto-enrolment was a Government initiative that has succeeded without tax-relief as can be seen by the numbers enrolling into net pay schemes who don’t get the inventive at all!
I am with Con Keating in questioning whether the current system of tax relief is doing anything but allow those who control the money to take the customary 2%pa in charges with something like a clear conscience. If people will still be better off after financial rape and pillage, you might argue that financial malpractice is a Government supported endeavour.
Scrap tax-relief
I am not for Government intervention, nor for change for change’s sake. I am certainly not for lower retirement savings.
I am not for compulsory saving for the reasons put forward two centuries ago by John Stuart Mill
the only purpose for which power can be rightfully exercised over any other member of a civilised community, against his will, is to prevent harm to others. His own good, either physical or moral, is not sufficient
I am for a system of incentivised saving and recognise that tax-relief has played a part in getting us to where we are today- not a bad place.
But I can see no sense in the current taxation system which we can’t afford, is over-generous relative to our neighbours, targets the wrong people, is about to be hit by the Tsunami of auto-enrolment and has perversely encouraged poor practice in the market sector.
I call for Government to scrap tax-relief on second pillar pensions and replace it with a fairer, more efficient and less expensive system of Government Incentives. George, you can quote me on that.
Rewrite your article to replace ‘tax relief’ with its correct term, which is ‘tax deferral’. Then re-read it. You will find that it points to an entirely different conclusion to the one that you have drawn.
…oh, and by the way, it appears that you still have not taken on board that £35bn wildly overstates things, because it neglects the £14bn paid in tax by current pensioners, and also completely negates the tax that will be paid by future pensioners who are currently saving. A point I made on one of your prior postings.
You clearly have an agenda here, and appear unwilling to consider any inconvenient facts that suggest directions different to the one you prefer.
This is a quote from an article in the FT on 16/1/2016.
“The Pensions Policy Institute believes that 29 per cent of the relief goes to basic rate taxpayers, 56 per cent to higher rate taxpayers and 15 per cent to additional rate taxpayers. A single flat rate would be more “progressive”.
So I am not sure where you have got your 90% figure from.
A very thought-provoking piece which, via the five reasons, challenges the current status-quo and hits home the message that radical change to the pension tax system and the incentive station of pension saving is urgently needed.
Seems pretty unfair to be taxed twice on something which would be the case if it wasn’t for tax relief on the way in. Of course better off people get more proportionally from the system but they also contribute more in tax. Also the majority of 40% tax payers wouldn’t really consider themselves to be particularly wealthy and need the help too I would argue.
Having read the article I am still unsure as to what you are saying. Are you saying that we remove the tax relief on money going into a bonafide pension arrangement but still pay tax when the pension comes into payment so that pensioners suffer double taxation? As to social spending in the UK being above the OECD average, well someone’s has to be, Henry! But the thing that worries me most about your idea is the effect on the money available for investment. Now that greed, sorry, the accountants, have scrapped DB, nobody is paying enough into their pension fund. If you are going to reduce the amount going in even further, effectively, by taking it post tax, then the situation is going to be even worse. The UK economy actually needs pensioners with a reasonable income level, because without us, who will buy anything? Leisure activities, transport, subsistance food let alone restaurants, all depend on the huge numbers of pensioners there will be over the years having money to spend. Making pensioners poorer will kill the UK economy, goodness only knows it is ill enough as it is!
This article has provoked a lot of passion and a lot of reads. i suspect that we will have a lot of both to come over the next few weeks!
The reason pension (social) spending is high in this country relative to OECD countries is the cost of Public Sector Pensions – MPs, Nurses, Doctors, Teachers, Fireman, Policeman, Council Workers etc. all with massive employer contributions on which no tax is paid whatsoever.
I will be less resistant to the radical changes mooted if they are to apply to everyone and not just those in the Private Sector.
Agreed this will be the rather large elephant in the room if any changes only affect the private sector. I have nothing against these public sector arrangements per se but they need to be accounted for better in the wider reward/tax debates.
Tax relief needs to be more progressive – some time back I read an article by Dr Michael Johnson(?) who proposed 50% tax relief on the first £10,000 only. He claimed that this would save billions in relief & be more of an incentive to those basic rate taxpayers who would rely on private provision going forward. Yes Henry your article has provoked a reaction but as there is no counter proposal as to what, if anything would replace tax relief then its all rather pointless and headline grabbing.
I agree it is all pointless. This government’s sole aim is to transfer money from the undeserving poor to the deserving rich, dressed up with denigration of said poor. These changes are probably aimed at larger profits for enterprises, resulting in bigger dividends for the rich. Nothing we say will change their mind!