The Welfare Reform Bill passed last week, As a result there is now a cap of £26,000 a year on the benefits a family can receive, wherever they are, whatever their need, however many in the family there are.
The issue is contentious: I do not support that cap. It's too crude to ever approximate to justice. Over 70,000 families will lose as a result of it, whether fairly or not.
But I have another reason for objecting. My research suggests that rather more families - more than 200,000 in fact - as quoted in the Guardian this morning - enjoy 50% tax relief on their pension contributions and get up to £25,000 a year in tax subsidy for their savings as a result.
The result is if you're on hard times the maximum benefit you can have from the state is £26,000 on which to survive, come what may. But if you're in the top 1% (the 50% tax payers are almost exactly 1% of all taxpayers) then you can have a benefit of £25,000 a year from the state to boost your savings and make you wealthier still.
You couldn't make it up. Except the Tories did.
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Very good point, Richard. I can’t see the justification for regressive pension tax-breaks. Its fine to encourage investments in pensions, but why should it be designed in such a way that the greatest benefit of the ‘relief’ goes to the best off while little goes to those with lower earnings. Surely it is the low earners who need the most support to enable them to afford to invest in pensions, while the high earners can afford to look after themselves without taxpayer assistance.
Surely it can’t be beyond the wit of human intelligence to design a fairer system? The problem is presumably political will, and I can’t see the Tories having any desire to take their constituency off their benefit when they can hit those who probably don’t vote for them.
Agreed!
It is not beyond the wit to be fair – but almost nothing about existing pensions in the UK works so the redesign has to be comprehensive
You are out of touch with public opinion here, Richard. Most people believe capping benefits to the average wage in this county is eminently reasonable, and many more that it’s overgenerous.
In fact once you tell people that there are some in this country who can receive £26k (and upwards) for doing nothing a lot will be livid. Try telling it to a secretary in Cornwall on £14k for example.
I really don’t care I am out of touch
I know I am
Indeed I’m proud of it
People are prejudiced and selfish, until they’re in need. I’m happy to say that’s wrong
So please don’t tell me I must bow to pubic opinion when it’s wrong. That’s what cowardly politicians do.
I absolutely agree with you Richard that the majority in the UK is prejudiced and greedy and this has unfortunately been fuelled deliberately by the statements and policies of the Coaltion Government. It sees its role as blaming certain groups and encouraging spitefulness and this serves to distract from the real issue of greed by the elites. I really hoped that this legacy from the 1980s and 1990s had been left behind but seemingly not.
Inequivalence much?
Pensions have a favourable status for the simple reason that it privately funds what would otherwise be a future public liability. As we are learning – people who don’t save for retirement do not magically dsappear, they become wards of the state at significant cost. Private savings for retirement were too low even before the damage wraught by Gordon Browns raiding of pension funds.
Further, the pension rebate exists to avoid double taxation. As I am sure you are 100% aware pension income is taxable. Therefore, without the rebate you would be taxed on your income at source, then re-taxed on your pension income at retirement. In this scenario, why would you save via pensions at all? You could just put money into investments and pay capital gains instead.
I am sure you would argue that the rich can afford to pay 52% tax on their income at source, and then another (say) 40% tax on the remainder at retirement for a total tax burden of 72% on pension income. But it seems a bit excessive, no? Especially when such people are likely sophisticated enough to move their savings into off-shore investments.
I’m generally for a cap on higher-rate pension contributions (already capped when the pot hits ~£1.8mn so this isnt a bottomless pit in any regard. If you want to be mathmatical about it the most you can get from pesion relief is £900k, while under the benefits cap you could draw £1.2mn if you were on benefit form 18 to 65). But lets be honest about why the pension rebate exists – to avoid double taxation and to help shift the burden of pensions from the state onto private savings.
At the other end of your problem – the cap on benefits exists to redress the balance between working and subsitance on benefits. In too many regions there is little/no incentive to gainful employment – this is a crude way to address that. So the two taxes are trying to deal with different problems, one it aiming to get people in work, the other aims to make working people save. Why would you compare the two except to score cheap points?
Lets discuss both these issues on their own merits, without muddying the water through base appeals to popularism.
It’s not a base appeal to popularism to say the state should not subsidise the savings of the rich more than anyone else.
The question actually is why should the state subsidise the savings of the rich at all? Surely the releif is only due to those who would not otherwsie be able to afford to save?
Shall we get to basics here?
Richard, as you say, the whole pensions system needs to be redesigned. You pointed out some months ago that the only growth which private pensions have achieved in the last ten years – after deducting management charges, investment losses etc – can be attributed to tax relief on the premiums and certain tax allowances within the funds
Most employees and the self-employed are unable to contribute more per annum then the annual Cash ISA allowances so they may as well opt to miss the tax relief but have total freedom over how and when the benefits are taken.
It seems to me many would be better off with Cash ISAs
They relief exists for the reasons I listed in my first post:
1) To avoid double taxation as pension savings are deferred income
2) To make pensions savings attrative relative to either not saving or investments that attract capital gains taxation.
The use of tax breaks to encourage people to save for retirement is both reasonable and in the interest of everyone – we are all on the hook for future pension liabilities of the state. Whether the current system is too generous is a completely reasonable question: I would argue it is, and that the cap on pension pot should be lower, and there should be a lower cap on contributions that qualify for highest-rate relief should be set at a reasonable level. But that reasonable level is not zero.
Or example, a £1mn pot cap and a 25k annual contribution cap would let you hit the cap in ~40 years or approximately your full working life, while still (in the first order) raising tax income for the government.
Cash ISAs are an odd grey area that will likely grow in popularity over time but historically there has not been the products to facilitate them being effective. Most people are not competant to invest their own pension savings, and suffer the inefficiency of being very small investors. Fixed income, in particular, is not amenable to very small investors though bond-funds are helping here.
The government reconized many of these issues when looking at the incoming requirement for all buisinesses to offer pension schemes which are opt-out rather than opt in. I would direct to to read their report (running to several hundred pages) on the problems associated with a fragmented market for pension providers (which is basically what you have if we move to a US-style 401k system where the ISA replaces pensions).
Most of the pension schemes were structured by actuaries based upon the sort of investment returns which could be expected in the 1970s and 1980s and the high charges were often not noticed, in relation to the net yields. With bid/offer spreads of 6% and annual management charges of 1.5% plus other actuarial supervision costs plus commission payable to the agents who set up the schemes, the tax relief becomes a significant element.
With today’s poor yields, 20% premium tax relief will barely cover the annual charges plus inflation so the only pension investors gaining significantly are those who benefit from higher rates of tax relief. With inflation over 5% and the return on a Cash ISA of 3.2%, even these basic low expense products are generating an investment loss.
It appears that the only winners are the highest tax payers and those creaming the charges in The City.
Indeed
Precisely so in fact
Single person, no children, unemployed.
Income:
Jobseekers allowance £67.50
Council tax benefit £Area/House cost. About £137.00/month
Housing benefit (capped) £area. About £530/month.
= 12K/year.
That’s basic. As you can see, both housing benefit and council-tax benefit are now capped.
This IS NOW forcing people to move, with many councils and housing associations now with waiting lists of tens of thousands, and times for appointments of over a year from application.
And we’re not talking about London, all areas have capped benefits now…so even those up north, with much lower housing costs are capped.
Even “low cost” social housing is capped…the cap seems variable in the extreme.
Put that with increased prescription costs (no, only a minority of claimants get free prescriptions, and those over 60 as well) and pensions increased as the CPI along with the problem that low-income people have lower health as well….and things are getting bad: Fast.
Surely the purpose of benefits is to support the less well off, not make them prosperous. As for pension relief, those getting the higher relief are also the greatest contributors to the fiscus.
In many instances people have taken a life on taxpayer funded benefits as lifestyle choice – these need to be discouraged.
I think you need to wake up to the fact that to the average person you have to work to become wealthy.
You have to wake up to the fact that most will never be weealthy
Most of the high benefit is comprised of council tax benefit and housing benefit. Neither is paid to the claimant.
Exactly right
It is actually a subsidy to the private rent sector
JayPee
Perhaps you should work in McDonalds or as a barista in a coffee shop to see how ‘wealthy’ you can become.
Or as an agency worker for a council.
On low money, probably near minimum wage AND having to pay for, and provide, your own protective equipment . A mandatory health and safety requirement…..except the ppe regs say it must be provided free of charge by the employer….but who IS the employer ??
Your comparison to a higher rate tax payer saving for his retirement and a benefit claimant being capped at £25k is a fallacious one. One is an individual providing for themselves and thus reducing their reliance on the state and the other is exactly the opposite.
The fact is that the family receiving £25k (equavilent to £35k pre-tax) in benefits have done nothing fto earn them and it is only the goodwill of the vast majority of middle- and higher-income which allows this.
It is not in the slightest fallacious
Both are state spending
They are exactly the same