“Fiscal purity is admirable – but” Steve Webb, himself once a pensions provocateur at the Institute of Fiscal Studies draws his red lines between his current and former employer!
In this article I look at what happens when the sacred cows – the taboos of pension taxation, get prodded by our greatest fiscal disruptor – the IFS.
There are few things about pensions that people understand but “taking a quarter of your pot as tax-free cash” is one of them. People plan around that number to pay off their mortgage, fund the world cruise, pay the family debt 0whatever. Even though the value of the pot may have fallen in the past 12 months so that our tax free cash entitlement may be less than the taxed equivalent last year, it is the tax-break that counts.
By “we” and “our”, I mean “my lot”. My lot are used to paying tax at 40 maybe 45% and we wake up in a sweat at the thought of being taxed at 55% on some money arising from our pension saving. To pay tax would be an achievement for many who – for want of paid work, may go through most of their career , caring or being cared for, earning scraps to ensure they maintain their universal credit. There is a part of society we do not know , for whom all cash is tax-free , but for whom there is seldom enough to feed the meter.
This is where the Institute of Fiscal Studies is coming from and by prodding the sacred cows of the wealthy, by listing the fiscal anomalies that skew the pension taxation system in favour of the “haves”, they appear to be looking beyond the current budget and current chancellor to a Government that might be prepared to take on the high-voting, party-funding interests of the mass-affluent.
The IFS know full well what they are doing ,we are approaching the season of peak paranoia amongst the wealthy and their advisers, the weeks and months leading up to the Spring Budget.
Here is the IFS speaking to the Financial Times
“While popular, this provides a large tax subsidy to those with high incomes and big pensions but is of no value at all to those with the lowest incomes in retirement: non-taxpayers.
At a minimum, the tax-free component should be capped so that it only applies to 25 per cent of, say, the first £400,000 of accumulated pension wealth: this would still leave about four in five of those approaching retirement unaffected,”
Like a trout to a fly, here is the response of the wealth management people
a raid on the tax-free lump sum would be “particularly unwelcome”, especially for those who may have planned to use it to help pay off a mortgage. “Were such a policy to be implemented relatively quickly, it could leave people in a very difficult place.”
Let’s unpack this; there is no such thing in this country as a pension mortgage. People with interest only mortgages which expire after normal minimum retirement age may plan to use cash from their pension pot to repay a loan but that is not a part of the mortgage, and there is no requirement on that cash amount to be preserved for the purpose. What the statement above is saying is that people have a right to plan around fiscal certainty.
No such certainty exists in other parts of the fiscal ecosystem. Those on benefits do not get rights to see the terms under which benefits continue as they planned. Nor do companies have rights to capital allowances protected. It is not a right to have fiscal protection on pension pots but it is considered electoral suicide to mess with the affluent
Here is Andrew Tully of Canada Life arguing on behalf of the oppressed affluent telling Jo Cumbo
including pensions within the IHT environment would be “hugely unpopular” when IHT is already hitting many more people. “It also risks changing behaviour and not generating much in the way of tax as wealthier people ‘rearrange the deck chairs’ by removing money from the pension environment and shelter it from IHT in other ways, such as under trust.”
Sacred two for the IFS to prod is the notion that money held in a pension wrapper should be exempt from inheritance tax. Of course it should – goes the argument – we have a right to avoid paying capital taxes and if you take away one wrapper we will find another. That is what an IFA can do – Andrew knows his constituency (and so – he suggests – does the Chancellor).
The third sacred cow left to prod is the notion that pensions are paid without a liability to national insurance, which in terms of national insurance makes them EEE. The high paid have worked out that by exchanging personal contributions for employer contributions they can opt out of NI and probably cajole their employer into sharing the employer national insurance savings too.
Meanwhile , those on low pay struggle to even get the minimum incentive to save – the relief at source denied to millions who pay national insurance but don’t pay tax and get neither national insurance or tax-relief on their pensions.
I appear to be straying into a no-go zone, not just for the Chancellor – but also Steve Webb, who is quoted by the FT warning
“Whilst ‘fiscal purity’ is admirable, a long list of complex reforms implemented over a period of decades is not what pension savers need right now,” said Webb, a partner at pension consultants LCP.
Not just “noli me tangere, these holy cows are more than untouchable, they are unmentionable.
30 years ago we entered into a contract which at delivery we find that the other party reneges on the deal. However, it is understandable as the Government can only take from the successful and prudent.
At the same time the over promoted politicians clamour for another 15 min of limelight, Westminster has become the longest running farce in the West End
I think we are missing something here! The IFS have never knowingly suggested anything that doesn’t help the highly paid, so surely what they mean is that 25% of pot value OVER £400,000 can be taken tax-free, not 25% of pot value up to £400,000.
Fundamentally tapping tax free cash – either in ISAs or pension lump sums would reshape the savings landscape and create a generation of mistrust. Money then flows to tangible assets and bubbles, particularly property.
I find the moral justifications for these savings raids as hypocritical. On the one hand, we should stop tax breaks for the rich to make things fairer for the poor. But keep the poor as poor.
The IFS is tasked with raising more tax – it’s that simple.
Nobody talks about measured approaches like eliminating tax relief on 40% contributions, even providing top ups of 5-10% on basic rate contributions or tapering state pension for those with enough private pots e.g. over the lifetime limit. These aren’t raids but maybe lack enough moral virtue signalling or revenue grab?