I am 56 this morning. I mention the fact for a reason. Whether I like it or not, George Osborne wrote his budget for me, and millions of others who are my age, and older. Whilst I have no desire to ever retire, if I get the chance, the fact is that the government's new pension plans are designed to give my generation the greatest opportunity for tax abuse that they have ever enjoyed. Let me offer a simple example using these new rules.
Take a man of my age who is a 40% taxpayer (and yes; I am). Now suppose they decide to put £10,000 into a pension when these new rules come into effect. The actual cost to them of doing so is £8,000: tax relief of 20% is given at source, meaning that whilst £10,000 is credited to the account they only have to write a cheque for £8,000 to achieve this result. In addition, they can put this pension contribution on their tax return and claim an additional £2000 of tax relief. A person paying the standard 20% tax rate can't do that: we have a tax system that, perversely, and unjustly, rewards the pension savings of those who are already better off.
Now suppose that this person who has made his contribution then decides to declare that they have retired. Admittedly, it looks under the new rules that they might have to wait until 60 to do this, but that's not long. This does not mean that they have to stop working. It does also not mean that they have to say that they have retired for all their pension arrangements. They can do it with regard to just this one contribution that they have made and put into a separate retirement policy. So, with regard to this policy, which has been safely invested in cash in the meantime, they can now do a number of things.
First they can take 25% of the value of the policy back, tax-free. For the sake of this exercise I'm going to presume that the interest earned on the policy in the year or so that it may have been invested covers the policy costs: it might not, but is not an unfair assumption. So, on a policy that cost them £6,000 after tax relief they now get £2,500 back, tax-free.
Second, they now decide to take the rest of the policy as a lump sum. Because they are still earning they are still a higher rate taxpayer so tax at 40% will be paid on this: That is £3,000, giving them an immediate return of £4,500.
Note the obvious point: they paid out £6,000 and have now got £7,000 back in cash, and that's before taking into account the fact that the money will have been invested tax free in the meantime Even if there were some policy costs for setting up the arrangement what is glaringly obvious is that George Osborne has now set up the equivalent of a cashpoint machine for those over the age of 55 and it will be dispensing money for free, and for those over 60, almost instantly.
If, suppose, instead of doing the above, the person making the contribution knew they were going to retire soon, and knew that they would then have an income which would then be subject to tax at only 20%. In this case the arrangement gets even better for them. Now they would only pay £1,500 in tax on withdrawing the lump sum, and will get £6,000 back from it plus £2,500 in a tax free lump sum. Now what was, in effect, a £6,000 pension contribution is turned into an almost guaranteed return of £8,500 in no time at all, entirely at cost to the taxpayer. Frankly, in that case, ratcheting up the contribution to the maximum possible makes complete sense, even if it's done at maximum cost to society.
All over the country I can sense that there are financial services advisers rubbing their hands in glee, and already writing their sales pitches to exploit this opportunity to make tax-free money on behalf of people of my age.
There was a reason why we had a 55% tax rate on pension withdrawals: it was to prevent this type of abuse. That is now being scrapped. The floodgates for abuse will be opened, and, I guarantee, that abuse will happen.
That, though, will not be without consequence. Once governments realise their folly when making such policy changes they tend to have panic reactions. In this case, I suspect, the whole future of pension tax relief will then be brought into doubt. I should not, of course, complain: I recently proposed doing just that. I do, however, think that such a reform is now much closer than anyone could have expected, precisely because this current policy change from George Osborne will come, in due course, to be seen as ill-advised as Gordon Brown's abolition of the 10p tax rate and his 0% corporation tax rate.
All chancellors are at least as much remembered for their mistakes as they are for anything positive that they did: George Osborne has just made his biggest error.
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What are the micro / macro economic arguments for having pension tax relief at all ?
As I’ve said: I think they’re now limited
I would get rid of them – especially with new higher ISA limits
With regard to cashing in Pensions I have small pension pot £34000 set up when my company final pension scheme was stopped before I retired I and many others would like to like to get hold of the money.
I cannot see what is wrong with that especially as I will be paying tax on it which could be more than if I took it as an annual pension.
With regard to future investment in pensions I fully agree with what you are saying
I do believe that there’s a case for encouraging saving for retirement and my sympathy lies with 20% relief, but no more, up to an annual contribution limit of, maybe the equivalent of the 40% tax threshold, to encourage, in a parody of Schapps’s words, hard-working people to do what they need to do.
Beyond that, I agree with what you’ve written because Osborne’s plan seems to me to be nothing more than naked electioneering dressed up as an opportunity for all when, in reality, it’s yet another example of this government’s total inability to do any joined-up thinking, the very short-sightedness that Gordon Brown so often exhibited with his the micro-management that ultimately led to his political demise.
I’d also argue that the biggest problem with pension annuities is with the providers of those annuities, who have presided over a situation where the lion’s share of any increase in pension pots has gone not to savers but to fund managers and pension administrators. That said, no-one can be surprised that Osborne won’t take the financial services sector to task.
It was very interesting to see the market value of pension providers fall so markedly in response to Osborne’s announcement, a situation those providers quickly addressed by announcing that annuities would become more expensive. Under “perfect market” rules, surely one or more of them would have seen opportunity in being the first to clean up their act and secure a “good guy” image they could use to build up business?
Ultimately, quite apart from the tax issues you correctly identify, I believe that the free for all Osborne has promoted will be at greatest cost to those pensioners who do not have the spare cash to build up a large pension pot, while 40% taxpayers stand to gain considerably. Increasing inequality will be the price most will pay….but how to make them understand it in the face of this government’s propaganda, deceit and condescension?
Agreed Nick
Just like to point out that many over 55s in public service can retire, take their pension and continue to work in the same job. Others get made redundant get a big payoff and get rehired. Perhaps these personal pension changes are just bringing parity to the trough.
My view is that this is an ill disguised tax raising measure that will mine those people’s pension funds who want to access their cash straight away. Still I guess its better than a pensions “bail in” on the rest of us.
Those people who’ve suffered the 55% rate in recent years are left looking pretty sick. Some parity with the new tax payment upfront on existing DOTAS schemes under appeal/enquiry is perhaps called for. Reduce 55% to their marginal rate? Surely we look to the Chancellor to be even handed 🙂
It’s not quite so bad as you’re making out, I don’t think: if the taxpayer gets £8,500 back from his pension, then he’s suffered 15% tax on the £10,000 that went in there originally. So it’s not quite free money, but it is certainly cheaper than you’d expect.
Basically, he benefits from being able to put an untaxed amount into the pot, and take a chunk of it out without tax. I don’t particularly mind people deferring income from the 40% band to a 20% rate, but ditch the tax-free lump sum – it’s a double dip.
Or perhaps make sure it’s taxed only at basic rate, if you want to allow people to take a lump sum without worrying about higher-rate tax. Part of me is thinking of the rules for chargeable event gains and top-slicing, but inflicting those on people seems a bit unfair…
Andrew
You’re happy that 40% tax can become 15% tax through a scam?
I say scrap the lot if this is what is going to happen
I would have hoped professional people would agree
Richard
No, I said I wasn’t happy with that.
I don’t think deferring a bit of income so it gets taxed at 20% instead of 40% is inherently objectionable, if it’s in the right circumstances. With pensions, locking cash away so you can’t get it in year 1 but can in year 10 seems like a reasonable set of circumstances. I sometimes think of my pension as being effectively money that I’m earning at some point in the future, even though I’m doing the work now, for example.
Getting tax-free cash is a different matter entirely.
Richard
I don’t think the “logic” of George’s reform stands up to much more scrutiny than this;
2015 PEOPLE CAN WITHDRAW FUNDS FROM THEIR PENSIONS- TAX FLOWS IN AT 20%
2015 PEOPLE CAN WITHDRAW FUNDS FROM THEIR PENSIONS- GROWTH IN CONSUMER SPENDING
2016 Someone else’s problem
I fear you are right
Andrew – the 40% taxpayer didn’t put £10,000 in, he stumped up £8,000 and received tax relief of a further £2,000, so surely he only put £6,000 in? How has he suffered any tax?
The £6,000 was what was left of his income after tax.
For example, Richard is a 40% taxpayer. If we look at a £10,000 slice of his pre-tax income, then ordinarily he would pay tax of £4,000 and be left with £6,000 to do with as he pleases.
If he pleases to put that £6,000 into a pension (ignoring the cashflow effect of having to pay £8,000 and reclaim £2,000), and then gets £8,500 back from that pension, then he has turned £10,000 of pre-tax income into £8,500 of post-tax cash. The missing £1,500 is tax, at an effective rate of 15%.
To look at it from the other side: he puts £8,000 into the pension, and gets £2,000 back in tax relief so it’s cost him £6,000. The pension scheme gets the £8,000, plus £2,000 in tax relief from the Treasury, so there is a total of £10,000 in Richard’s pension pot. When that £10,000 is passed to Richard, he has to pay tax at 20% on 75% of it – a total of £1,500.
Andrew
Why are you distorting data?
Richard
Which data? That’s a clear and unambiguous account of what happens, isn’t it? £10,000 of pre-tax income is converted into £8,500 of post-tax cash. I can’t see any distortion at all.
You could argue that £6,000 of post-tax cash is converted into £8,500 of post-tax cash, but it doesn’t really seem sensible to talk about a tax rate in that situation. If anything would be a distortion, it would be ignoring the £4,000 of tax which is initially due.
I don’t see any distortion here
A 40% taxpayer can use the pension rules, to reduce the tax take on a portion of income down to 15%
Originally tax relief was given on pensions to encourage people to invest in their own pensions – presumably this was preferred to increasing state pensions and (I would asusme) in line with neoliberist idelology that one should be in charge of one’s own destiny and should not be reliant on the state.
ps – My Financial Adviser is clearly not on the ball as he hasn’t been on the phone trying to sell me your scheme already. On a more serious note, presumably Osborne is well aware of the above and is quite happy to give money back to pensioners … just not via the state pension … could that be becasue the state pension would go to everyone but the ‘relief’ outlined by you will go to the ‘better off’/ his voting public – I am guessing I missed some of your blogging pointing this out already.
Your final thoughts are, I am sure, spot on
Happy birthday to you then, Richard.
But also, thanks for this very straightforward illustration of what Osborne’s changes mean. I too am a potential beneficiary of the “free money” policy.
Also interesting to read your closing comment on the morning when its become apparent what the true cost of the government’s higher education funding policy (i.e. loans) is going to become. http://www.theguardian.com/education/2014/mar/21/student-fees-policy-costing-more
Ultimately what we are seeing with the pension policy is the continuation of something that’s a hallmark of the ConDem government: very little thought put into the longer term impact of policies AND how changes in one policy domain impact on other policies in other domains. Or, it may be I’m wrong and they do think about these things but choose to ignore them anyway. In which case, this must be one of the most irresponsible governments in modern history.
Whatever criticisms many of us may have of the Blair governments, “joined up government” was a central concern from 1997 onwards. That approach undoubtedly improved policy development and thus the effectiveness of policies across government (albeit that we now know that the animosity between Blair’s and Brown’s “teams” in the latter years of New Labour undermined the principle). However, in the case of the ConDems I’ll confidently predict that their “throw it all up in the air and see what lands where” approach to policy will cost this country and its citizens dear over the coming years. It’ll also prove an ongoing curse for whatever party’s (or plural) in government after the next election.
Glad we agree
Ivan, additionally wasn’t the student loan book sold off at 19p in the £ last year? Isn’t it financially better, and with less hardship, to have near-zero or negative fees. Rising fees at Postgraduate level are also concerning and put off undergraduates taking necessary extra training to gain the skills and knowledge for an advanced society and economy. The underlying principle is to in-debt citizens as early [and as often] as possible?
This debt is so worthless the whole loan debacle has been proven not to be about funding but about ensnarement
It was, Tony_B. And with rising fees for postgraduate study having a negative effect on that end of the higher education “market” we are rapidly heading into a right mess. But ultimately you and Richard are both on the nail with what this policy is really about: entrapment/ensnarement of the young in a web of debt from which many will never escape.
Of course the other benefits for a Chancellor is that all that cash is now part of your assets and can be taken to fund any care needs that you have, and will also be available to pay off all those interest only mortgages.
Yep….local govt. will of course love the idea of older people with more cash…..
Happy birthday Richard
And,based on this info i just might be tempted to make my first ever voluntary contribution into a pension fund.
Richard
On reflection and entering your data into my spreadsheet gives a tax free bonus of 2200 w.r.to contributions in at the HR and BR on withdrawal and 400 HR in and HR out. Not quite such a nett after tax bonus over the initial contribution as you portray but still a bonus never the less.
Krs
Roger
Happy Birthday Richard
Thanks!
Happy Birthday Richard -and many thanks for your work. I should point out, as a Quaker pedant, that ‘times and seasons’ are not celebrated -enjoy it anyway!
There are limits to my Quakerism
Most do Christmas too!
Don’t forget the non-taxpayers. They can pay £2,880 into a pension, which is topped up to £3,600. They should then be able to draw the whole amount down tax free, so it is a bonus of £720 per year for non-taxpayers with reasonable savings in the bank. It looks much better than bank interest to me!
There was of course an old version of this where you did the same and bought and annuity because interest rates were better.
Good point
As a pensioner and standard rate tax payer, my spreadsheet gave a gain of £180 on £2880, or 6.25%. Which is still ridiculous, though my default theory is always cock-up rather than conspiracy.
How many non taxpayers could afford to part with £2880?
I am sure there are plenty of pensioners with cash savings that are non-taxpayers, particularly when you look at pensioners that are dependents of somebody receiving a decent pension.
Will the BBC or any of the other MSM channels let you put this across on TV and radio Richard? I stopped watching and listening to the BBC for news content a good while back; but my mum had the TV tuned into the Six O’clock news on the day of the budget; the BBC report on the budget was the most blatantly pro-government account I’ve seen in a long time. They didn’t even report on the People’s Assembly budget day protest; instead the voice of the nation was found at a Northants golf club.
I have been asked to do Radio 5 – but have spent the day in bed ill so no chance I am afraid
Get well soon Richard 🙂
Well enough to be on my way to Paris to negotiate with the OECD this afternoon….
I’ve ditched my TV license after protracted negotiations with my son! I consider the BBC news unwatchable in its condescension and simpering, cloying approbation of the status quo -The beebs time is up, I feel, in terms of its probity on all levels. I now see the TV as a largely neo-liberal portal in the lounge – not welcome in my house!
the cash injection will support short term economic growth based on increased spending and any tax paid will bolster receipts, reducing public borrowing.
something is needed to manipulate the books when the cash from banks’ income protection mis-selling runs out! this is it, and it’s no more than medium term `barbarism` to cook the score card. there will be hell to pay when it ends.
“Oh, and one more thing. If you think about it, this reform effectively converts pension pots into just another form of future savings. So why should this one particular form of saving attract such a huge tax benefit for higher rate taxpayers? Doesn’t this, at least theoretically, open the door to a consideration of what the appropriate tax treatment is for those saving for a pension, and the balance of advantages that currently exist. One might argue, that there should be greater encouragement for those on lower incomes to save for the future, not for the richest. Perhaps this is an issue any Keating commission could consider? It might even lead a labour government in a happy position of offering most people an extra incentive to save”
http://hopisen.com/2014/its-my-money/
He is probably one of the last people on earth I would pay attention to
The ‘huge tax benefit’ you claim is basically just a deferral of tax (not really a reduction in tax). Hardly as generous as you try and claim…
No it is not, as I have very clearly shown
Stop lying
It’s partly a deferral of income, which might then allow it to be taken at a reduced rate, and partly the fact that 25% can be taken out tax-free.
Those on lower incomes should save for a pension? How do you imagine they will manage that? People are not stupid: they save when they can and when it is beneficial to do it. Since the pension most people “saved” for has been stolen by government there is no secure place to put any “savings” any more. Interest rates on savings accounts are lower than inflation and the private schemes are worse, if anything. Everybody knows this. It is why those who can afford to put their money into property, although that is to the detriment of us all: it is why housing market inflation is seen as a good thing, while all other inflation is said to be bad. Our plutocrats have succeeded in two ways: they have persuaded a great many that their interests are aligned with those of the very rich; and they have made that true for more people by leaving no alternative but to try to amass property assets if that is at all possible. It is a disastrous policy for most and it is not sustainable.
OT.
I hope you will not mind that I have copied the posts above by David Kirkham and Simon to Wings Over Scotland.
http://wingsoverscotland.com/welcome-to-gobblers-knob/#comment-856381
I have done this because there is a very strong thread in the Scottish independence debate which relates to the bias in the BBC, and I found it very interesting that similar conclusions are reached by those who post here on very different topics, for the most part.
I truly valued the BBC of the past: but it has gone the way of all public service by now and once again I find I have strange bed fellows: those neoliberals who wish to abolish public service broadcasters have won for all the wrong reasons. Again 🙁
See below the front page article on yesterday’s FT FM supplement. What joy for our wonder financial sector. And what joy also for the buy-to-let market. This little baby is set to give a mighty further wobble to our dysfunctional economy.
Asset managers to win big in UK pension overhaul
Flurry of innovative products expected
By Steve Johnson
Schroders, Henderson Global Investors and Jupiter Asset Management have been widely tipped as the biggest winners from a dramatic redrawing of the UK’s retirement income landscape.
From 2015, UK retirees will no longer be compelled to convert their retirement savings into an annuity contract with an insurance company. This opens the door for asset managers to compete more strongly in the post-retirement market.
Barclays last week estimated the annuity market would shrink to £4bn a year, from £12bn in 2013. RBC Capital Markets predicted it would slump by 90 per cent. With Fidelity Worldwide Investment estimating that 70 per cent of UK personal wealth is held by the ageing “baby boomer” generation, the opportunity could be sizeable.
“This could be the dawn of a new age for asset managers. These changes are going to have a major impact,” said Amin Rajan, chief executive of Create Research, a consultancy.
Maarten Slendebroek, chief executive of Jupiter, added: “We see this as positive for the asset management industry and primarily good news for the UK savings industry.”
Bruce Hamilton, asset management analyst at Morgan Stanley, said Schroders was best placed to benefit among listed companies, given its strength in multi-asset income products, alongside Hargreaves Lansdown, the platform.
Philip Middleton, analyst at Bank of America Merrill Lynch, said Henderson, Jupiter and Schroders would be best positioned to deliver less volatile versions of the “multi-asset or balanced funds, or possibly some kind of hedge fund product” that he believes will emerge as alternatives to annuities.
The sudden change in the regulatory landscape is expected to trigger a flurry of innovation.
“I think there will be a rush to get quality asset management solutions developed. £15bn a year is now up for grabs for the asset management industry. That money has been out of reach to us,” said David Hutchins, head of pensions strategies at AllianceBernstein.
Mr Hutchins added AllianceBernstein would, within weeks, start shortening the duration of the bond portfolios used to back its target-date funds. It manages these funds with more of an eye to maintaining their capital value rather than their purchasing power in the annuity market, in the belief many clients will instead prefer to take cash at retirement.
Mr Rajan expected to see more products that combine a regular income, inflation protection and low volatility. “These products are already on the market in the US [where there is no compulsory annuitisation]. It’s just a matter of time before they take off here in the UK.”
In particular, Mr Rajan saw strong demand for diversified income funds and cheap commoditised income guaranteed funds, that combine a modest yield with a degree of capital protection.