Are these guys worth it?
There were two publications yesterday by Government that are very helpful
The first is from the DWP and talks about our savings behaviour – to some extent the outcome of the savings incentives put in place by the Treasury and administered by HMRC
The second is from the Treasury and looks at the cost of these incentives to the public and how spending behavior is changing as private pensions move from annuity style to drawdown style “decumulation”.
The savings industry is focussing on savings and economists are focussing on the cost of incentives. I will look at the cost of pensions first as this is of direct import to a key Government metric “value for money”.
High level cost of incentivising pensions
We learn that
- gross pension Income Tax and NICs relief in 2022 to 2023 is estimated to be £70.6 billion, up from £68.1 billion in 2021 to 2022
This is the total amount lost to the public purse by incentivising pension contributions to individual savers.
- Class 1 Primary and Class 1 Secondary National Insurance contributions (NICs) relief on employer contributions (including those made via salary sacrifice) is estimated to be £23.8 billion in 2022 to 2023, up from £22.6 billion in 2021 to 2022
About a third or the amount lost is to national insurance receipts, two thirds to income tax. Salary sacrifice has created a big up-tick in NI costs in recent years though decreases in NI rates should mean lower costs in future
- Income Tax paid on payments from registered private pensions is reported to be £21.1 billion in 2022 to 2023, up from £19.5 billion in 2021 to 2022
We are withdrawing more from pensions, not so much from DB schemes but from personal pensions, the way we withdraw from personal pensions is less tax-efficient and puts more money in the hands of the Exchequer, (known to some as “muppetry”)
- the estimated net cost of pension Income Tax and NICs relief is estimated to be £48.7 billion in 2022 to 2023, up from £47.6 billion in 2021 to 2022The overall cost of incentivising pension contributions is now £48.7bn , most of the increase will be down to wage inflation as most contributions are made against salary and not from savings.
There are a lot of nuts to pick out of these figures but I will focus on two that I think really matter to Government
The first is an analysis of who pension incentives are benefiting most
The biggest slice of the pie is the cost of providing higher rate tax relief and additional rate relief. Basic rate tax relief accounts for little more than a third
But we learn elsewhere
The amounts of tax relief paid , do not tally with the amount of tax paid. Higher rate tax payers while being outnumbered 1;6 by basic rate tax payers, got a much higher slice of the tax-cake. The wealthy are scooping the pool and the poorer earners are subsiding their wealth accumulation. Put like that, pensions are Robin Hood in reverse.
A Labour Government is more likely to be appalled by this by a Tory one, but anyone with a mind to see taxation implemented in a progressive way, must ask whether our pension taxation system is designed for adequacy or as a tax-shelter for the rich.
How are we spending our DC wealth?
The trend towards DC and away from DB is not just a matter for companies and their balance sheets, it has profound implications for savers, especially since the abolition of mandatory annuitisation (for most) in 2015,
We learn from the accompanying DWP document that
Overall, the vast majority, 95%, of the 12.7 million individuals in receipt of a private pension payment in 2023 to 2024 are in receipt of a Defined Benefit or an annuity.
However, this is slowly changing. When assessing private pensions accessed for the first time, the proportion receiving a lump sum or other Defined Contribution product has risen from 37% (280,000) in the 2016/17 financial year to 49% (390,000) in the 2023 to 2024 financial year.
So nearly half of us are accessing our “pension” for the first time from a DC pot rather than instructing the trustees to start paying us a scheme pension (the defined benefit).
Those withdrawing flexibly (via drawdown) seem to do most of their withdrawals in the first quarter of the year, this may be to pay off Christmas or it may be tax-planning but there is a distinct trend
This suggests to me that people are not providing themselves with consistent incomes in retirement despite a recent survey by Scottish Widows saying that 80% of us want a steady income that lasts as long as we do. The rhythm of the turquoise line suggests we are getting into an unusual pattern of withdrawals that needs closer examination.
And it seems that over time we are learning to defer the consumption of our DC pots with less than a third of withdrawals now made by those between 55 and 60 and higher amounts being withdrawn in later age. This suggests a maturing DC population but not necessarily more prudent behavior.
The timing and incidence of pension withdrawals among the non-advised population (by proxy, those with smaller pots who don’t take advice) is a worry to Government and one of the reasons it has put requirements in the Pension Bill for trustees to offer means to turn pots to pensions.
Part of the value that the tax-payer is looking for from incentivising pensions is that pensions provide security throughout later age. There are many other calls on the exchequer from the elderly including the costs of the NHS , social care and the imperative to pay state pensions and benefits at proper rates.
The new Labour Government is likely to be looking at this report with particular attention, We are paying nearly £50bn a year to support the private pension system but are we getting value for that money?
