For many people who think a lot about their personal finances, their pension is a convenient safe to hide money from HMRC. This statement is taken from work done by Claer Barrett of the FT on responses to a “how I use my bonus” survey , involving readers and published here. High tax rates do indeed drive the behaviour of those working in and around the City.
This makes a lot of sense if you aim to maximise the efficiency of your investments using wrapper labelled “pensions” to avoid national insurance , income tax on contributions and taxes on investment gains made.
Pensions are particularly efficient at present because employer contributions to your pot or to buy pensions are not subject to national insurance. And the amount that is saved by companies in paying your pension contributions loses HMT/DWP almost exactly what they get back from us drawing down on our pots and getting pension income.
Damien’s key insight is that the average win for those in pensions is over £785 for each human being living in the UK. But this is of course anything but how tax gets saved. The kind of person who cares about tax relief, national insurance saving and like tax free returns on their investment are not thinking about pensions but about wealth.
As has been proved by the furore over inheritance tax, there are many for whom a pension pot is not to be touched but paid to the next generation on death, as a means of avoiding capital taxes – most importantly IHT which is pernicious to those sufficiently wealthy to need liquid funds to meet HMRC demands.
The idea that saving voluntarily into a pension plan for pension has all but been extinguished by the money purchase AVC which can often be exchanged for tax free cash and very rarely is exchanged for extra pension.
Tax is a driver for almost every voluntary pension payment. But there are many people who opt out of workplace pension and they are not doing so for tax reasons. They are the people who do not want or cannot afford to make pension contributions through payroll.
I am reminded of presentations I did with Harold Davenport in Rotherham miner’s clubs in the mid 1980 when people still thought of themselves as in miner communities. Harold would bring out in front of tables of men a large folder that was full of cut out pictures of ladies from gentlemen’s magazines.
When you retire, do you want some of this?
Harold would ask, pointing to a busty woman.
He would then open up the other side of the folder which would be stuffed with £1 and £5 notes .
If you want out of them , you’ll need plenty of these.
Harold would conclude, pointing out the bank notes. There would then come out applications to pay more into the pension.
There are two ways of selling retirement , white collar and blue collar. We focus on white collar sales because that is where the money is, but the blue collar world is one of need and is generally ignored. I don’t suggest we go back to old-style techniques as perfected by Harold, but I suggest that we need to get to grips for the need of blue collar workers to have pensions paid to them so they can have decent lives and tax and national insurance don’t matter in discussions about pay now- pay then.
Forty years on from the Rotherham miner’s club