Two ‘p’s in Tapper
Not my phrase – Jo Cumbo’s. Read her brilliant article on the travails of our super-earners who struggle to cram enough money into their pensions.
The annual allowance taper can see a £40,000 pa annual contribution allowance diminish to £10,000 as total earnings ratchet towards £200,000. There is a whole super-class of wealthy people who will never see a pension input period for which they can pay more than 10k – again!
Well my dear friends, this is the price you are paying for George Osborne’s pension-Brexit funk in Q4 2015 and Q1 2016. The reason why you are subject to some of the most complicated tax-rules ever is because we did not move to a simplified contribution structure when we could have. And the reason we didn’t was so we didn’t lose the hearts and minds of the British public who otherwise might have voted for Brexit.
Which they did.
Jo and I had a few conversations in those months preceding the spring budget in 2016. We were both hearing the leaks from the Treasury trailing a TEE pension system that would have used some pretty brutal tax-recovery methods. This would have gone a lot further than the loss of higher rate tax relief but it was eventually buried.
So those struggling with the taper can keep their tantrums to themselves, it could have been a whole lot worse. Paying tax on some of your tax-incentivised savings is not unusual. The deferral of tax under the EET system still makes the “penal” taxation of contributions over the AA taper (or indeed the LTA) anything but.
Frankly, outside the magic circle of advisers, consultants , reward directors , accountants and lawyers, there will be few if any taper tantrums. The entitlement culture that supposes that for every higher rate tax there is a loophole is endemic.
In reality, paying tax at 55% on a part of your wealth will not materially impact your happiness- unless you let it. The obsession with tax mitigation quickly becomes self-defeating. What matters is not the tax you pay but the enjoyment you get from what’s left over!
The days of uncapped pensions are pretty well over and if your idea of a good dinner party conversation focusses on the guest’s preserved LTA then your pension pot is eating you!
Any argument that the disenchantment of the LTA classes with their pension lot influences interest in staff pensions holds no water. For this privileged superclass, the pension is just another tax-avoidance scheme to be filed alongside film-funding EIS and the portfolio of venture capital trusts. No amount of tax advantages are enough to make the super-earners share the love.
Only in the USA, where the executive tax-breaks are linked to 401k take-up is there some form of alignment between tax and social interest.
This may sound brutal but I see no reason for maintaining the pension tax-breaks for the super earners. The AA taper is the consequence of weak Government pre the referendum and the high-earners who are moaning that their tax-breaks are diminished should be reminded that 80% of tax-relief is earned by the 20% of tax-payers of which they are prime candidates.
It is, I admit, unlikely that I will HR or Reward, but heh! – I quite like it out here!
The above-mentioned article can be read here https://www.ft.com/content/cbf67b2e-08a7-11e7-ac5a-903b21361b43 (with an FT subscription)
Rarely do I disagree with you Henry, but on this I do. Higher Rate tax relief on pensions should remain in my opinion based on pension contributions simply being “deferred pay”.
If the chncellor wants to tax higher earners, then be honest, put your case Mr C and do that through income tax.
Pensions as deferred pay does grant 25% tax free element to it and I am with Henry – no need to incentivise high earners to do this. The taper is a very clumsy, inefficient way to go about capping it but complaining about it by those earning, or represnting them, over £150,000 p.a. is indeed just tantrums.
Saying that “it could have been worse” is no excuse for the ridiculous complexity of the AA taper. The same thing could have been achieved much more simply. You also seem to have lost sight of the fact that contributions over the tapered AA are not ‘tax deferred’ EET money, but are TET. Most reasonable folk recognise double-taxing income as inherently abhorrent.
And on the LTA, the problem here is two-fold. The repeated reductions have done nothing at all to give any sense of stability or reliability to pensions. And unlike the AA taper, which only affects future contributions, both the LTA and more especially its reductions chisel away at both PAST pension contributions and good fund performance, making it so that people who contributed to pensions early in their careers would have been better off waiting.
People at or above the LTA are in a position to retire early, and the punitive (and yes, it is punitive under the look-back-in-time effect described above) tax treatment they face will motivate them to do exactly that. An earlier than anticipated retirement may not be a bad thing for the individual, but the consequent loss of future employment income tax and NI from them will likely be a losing deal for the country and the exchequer.