Tax is a Tory thing- the rich are obsessed with not paying it, the poor pay relatively more in tax but don’t notice.

In this election Rishi Sunak has tried to make something of pension taxation by worrying poor people that without a Conservative Government they’d be left to pay tax on their state pension.

In the meantime, the Labour Chancellor has been evasive on the potential wealth tax she wishes to reimpose on pensions (the Lifetime Allowance) while the prospect of a wholesale reform of capital taxes on retirement wealth could mean the biggest loophole for the mass affluent – (the tax-free inheritability of anything within a pension wrapper) is a likely outcome of a Labour victory. It is certainly a policy that the IFS would like to see enacted.

Changes to the taxation of contributions is not an issue in this election. The Conservatives have not mentioned that they have removed the net pay anomaly, something that they will get no credit for as the dividends will start arriving in 2025. The taxation experts would like it to be an issue but Rachel Reeves has ruled it out. I went over this ground earlier in the week but the arguments are well rehearsed in this tweet exchange.

Pensions tax rules are complex, ridiculously so. Changing them is a nightmare. My only counter is that changing the rules being hard has never stopped them in the past. https://t.co/HoxT2pkUhZ

— Dave Brooks (@PensionsDave) June 5, 2024

In the case of fundamental change like flat rate relief or moving to TEE, it has always stopped them in the past.
(Sort of: the decisive factor in 2016 may have been the hostility of some Conservative MPs towards the then-Chancellor ahead of the EU referendum.)

— David Robbins (@David_J_Robbins) June 5, 2024

Amidst this flurry of speculation , you might think that pension taxation is an irrelevance, and side with my friend  @GlesgaBrighton who is clearly wanting to talk about better things than the LTA

How depressing that so much time is spent on the lifetime allowance rather than on how to deliver better outcomes in retirement for the vast bulk of future pensioners.

— andrew young (@glesgabrighton) June 6, 2024

But while he is right about priorities, he shouldn’t forget that the course of pensions in the past fifteen years has been changed by the removal of a tiny piece of tax legislation (the requirement for most of us to annuitize our pension saving).

For those for whom a pension pot is an inheritance, the taxation of that pot – were the IFS’ recommendations be taken up would have almost as radical effect for many people I know who will not leave estates on which inheritance tax will become payable, still consider the tax-advantaged status of an inheritance tax free pension pot a valuable legacy.

Herein a second truth; people aspire to be rich enough for tax-breaks to matter. This is why wealth taxes are so contentious and why I fully expect the Tory manifesto to be all about the abolition of inheritance tax altogether. Along with the elephant of long-term care, the thought of estates having to be sold to meet the IH tax-bill following a parent’s death haunts middle England.

For the vast majority of people, the personal allowance for the over 67s, the LTA and even inheritance tax do not matter at all. They aspire to pay wealth taxes and have a vague notion that they will pay no tax on pensions in retirement. The Conservatives put doubt in the mind that Labour will allow them to retire tax-free and dangle carrots about aspirational wealth taxes being removed. It is fantasy politics – these pension tax issues don’t matter to all but the top 10% most affluent in the UK.

Pension taxation shouldn’t matter but it does.

Meanwhile the over-taxation of the poor through the net pay anomaly was ignored by all but a handful of tax-geeks (the Low Income Tax Reform Group). Where pension taxation matters, it is often ignored because it happens by stealth.

The abolition of the tax advantages of pension pots – as opposed to pensions, is meaning that millions of people who will never get an IHT bill, are not spending their pension pots as pensions. They are ripping out the tax free cash from their pots and leaving the rest to pay an imaginary IHT bill.

People want an income in retirement but can’t work out if they want it more than leaving money to their family. Faced with this dilemma, millions do nothing with their pension pot , preferring to live poorly than to be seen to be spending the family silver.

In short, the real issue of the pension freedoms is not people buying Lamborghinis but people not buying anything at all. The main people who benefit from deferring consumption between generations are the pension providers.

Pension wealth-taxes matter a lot – due  to our aspiration to make our families wealthy. That most of us will never pay them – doesn’t matter at all.