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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.