In this article I argue that any tax increases levied on the rich are ok by me, and I’m rich.
The bias of vested interest
The vast majority of people get tax relief on their pension contributions. Some people are excluded by being non-tax-payers. This is because of the net-pay lottery (enough said).
I will remind readers that since the introduction of stakeholder pensions, people can get incentives to save – even if they are still children – rich parents have been pre-funding children’s pensions for nearly 20 years. There’s no tax-loophole that those with excess savings won’t exploit. But I won’t carry on about the iniquities of the “information asymmetry”.
I will instead focus on the annual and lifetime allowances which are designed to limit the amount of higher rate tax relief that the top 1% of earners get as a tax-subsidy for their retirement savings. These caps are in place because the Government has not properly tackled tax-relief on contributions, something they last threatened to do as a result of the extended tax-consultation in 2014-15 that came to nothing.
The rules around the annual allowance , the money purchase allowance and the lifetime allowance are complex. The thresholds for contributions and capital sums are still way above the aspirations of most people. The annual allowance is about 1.5 x the average wage and the lifetime allowance still allows us to be pension millionaire’s before being taxed at higher than normal levels.
There is undoubtedly scope for further reductions in both annual and lifetime allowances and if the Chancellor decides to fund the NHS rather than rich people’s wealth pots – so be it. I would rather see a properly functioning health service than a taxation system skewed to the needs of the financial elite.
Proper reform is long-overdue.
The work done by the Treasury in the 2014-15 revenue is not lost. It sits in some digital locker and can be revived at any time. It is possible for schemes to pay all kind of things (including HMRC claims on a fund) and this is how the taxman collects money from those who overpay their pensions at present.
We know that “scheme pays” was an option under consideration , when the Treasury were seriously contemplating a move from EET to TEE (where there’s no tax-relief on future contributions and those contributions are tax exempt on repayment.
People who think that “scheme pays” could not be used to reorganise the allocation of tax relief should be careful. With Real Time Information, the Treasury have much bigger guns to play with.
Tinkering with the Annual Allowance and Lifetime Allowance may be the least worst option for the wealth management industry.
It’s the wealth management industry that’s under attack
Let’s not mince words, the pensions industry is now a “wealth management game”. People are increasingly cashing out their defined benefits into wealth and the idea of converting wealth back into pension is deeply unfashionable. Many wealth managers are now managing money for their clients as a means to mitigate all kinds of capital and income taxes. “Pensions” is no more than the title given to a tax wrapper.
Those organisations who try to reassert pensions as a “wage in retirement” are shouted down by the wealth management industry. It’s happened twice in the past two weeks, firstly when David Leech and Jon Spain argued for risk-sharing at a CSFI event in London and secondly when Con Keating argued for CDC in a posh hotel in Hampshire (CA Summit).
The idea that anything can get in the way of the relentless surge towards treating pensions as a “capital reservoir” is seen as absurd. Wealth managers rail against the 1;20 exchange rate for DB pensions , arguing that the ridiculous transfer multiples enjoyed from schemes with gilt based discount rates, is the new normal.
Some of these people even argue that scheme pays could be used to pay financial advisers for transfer advice if contingent charging is removed.
Small wonder that Chancellor Hammond sees pensions as easy game. Any sense of the social purpose that was originally ascribed to justifying pension tax-relief, has been swamped in the wave of industry euphoria over pension freedoms.
The Chancellor has some justification in taxing the wealth management industry, though whether he dare, in the face of his wafer-thin commons majority, is another matter.
Should we care?
I am beyond special pleading for “no-tinkering”. The wealth management industry is so adept at tax-avoidance that it almost relies on the threat of further tinkering to justify the advisory framework it has created for itself.
Losing a few more tiles off the pension tax-shelter will not seriously harm the wealth management industry which will continue to service the needs of the 6% of us who regularly take financial advice.
Ignoring the needs of the 94% of Britain’s who don’t take advice (and typically use the NHS) is a more serious matter.
If the Chancellor chooses to whittle away at the tax-privileged status of the wealth management industry’s favourite tax-wrapper, that’s fine by me.
I am no longer in wealth management and my pension is not large enough to be affected by the current LTA nor any realistically likely future reduction but there is a hell of a lot wrong with retrospectively taxing people who made choices based on the rules of the game before the rules were changed. People need to be properly taxed on inc0me and capital gains and companies need to be properly taxed on profits. Political parties have no spunk and are afraid to talk about truely massive demographic issues. They pander to the concept that entrepreneurs deserve massive rewards and that taxation would harm innovation and productivity. And so they tinker around with easy win tax grabs regardless of their fairness. LTA is a crap idea. Annual allowance is not retrospective and is therefore a different kettle of fish. But LTA is robbery.
“Rich” comes in many forms arguably. But is it right and fair that somebody who is in a final salary defined benefit scheme can receive a pension of £50,0000 without breaching the LTA (£1,030,000) whereas a DC pension would need to be worth circa £2,500,000 to provide the same benefits. Where is the “richness” here? One gets a nice £50,000 for life whereas the other hands over £850,000 potentially of his (hard earned!) pension pot as a LTA charge.
If the government of the day or any government continue to tinker with long term pension investment saving it is no wonder young people are avoiding contributing to pensions.
In the interests of accuracy, the social purpose of tax relief is a bit of a red herring given the way pensions actually work – and has been for ages. See Fowler Drew’s paper ‘What next for pensions tax relief?’ in 2016 in response to the Government’s decision to defer any decisions following the Treasury consultation: https://bit.ly/2yn4Qzs.
Using the HMRC tables (PENS6) we showed that only about 15% of the assumed cost of tax relief relates to non-contractual saving where tax is potentially even a factor. Most of the rest is accounted for by employer contributions to DB pensions where the tax incentive is via corporation tax and the employer is indifferent to pay or pension. Most of that is in turn a function of NI treatment – the real issue for equitable pension tax treatment.
The social purpose was not just to provide a pension. That could have been achieved by insurance – and indeed was the case when all pensions took the form of a deferred annuity. The big change in public policy was the additional objective of using pension resources to promote risk taking and growth in the economy as a whole. For this to work logically in the context of either i) discretionary or non-contractual employee saving or ii) DB schemes, there must be a ‘growth dividend’ that covers the cost of the tax incentive, otherwise there is an inter-generational transfer of resources that politicians are (generally) rightly keen to avoid. The growth dividend logic has largely evaporated in the case of DB (due to perverse incentives to avoid the volatility associated with productive assets) and so really only applies now to the small fraction of non-contractual employee pension saving. It is also not entirely clear the growth dividend will be earned.
It’s hard to avoid the conclusion that tax relief is in fact utterly pointless as a means of promoting saving without generational transfer. While saving for retirement is a sound public-policy objective, it should be blind to the form of holding vehicle or the risk preferences of the employer or employee.
This does not mean that bargains made in the past between individuals and HMRC should not be honoured in full. That includes, specifically, the tax free cash without which any utility gain from saving in a pension would be entirely dependent on a reduction in tax rates between accumulation and decumulation – something that is only known after the bargain is struck.
The argument that tax relief is pointless is a fair one to make, but it still doesn’t deal with the need for society to encourage deferred consumption. If we had no long term savings into liquid assets, the consequences for future generations would be genuinely unfair