IFA Online covered ‘Making Pensions Work’ yesterday, giving it a good report.
In response they also noted that:
Tom McPhail, head of pensions research at Hargreaves Lansdown, says Murphy has missed the point of tax relief.
"Tax relief is a way of deferring taxation on the income in order to encourage deferred consumption," McPhail says.
"Murphy offers up a straw man in stating the general assumption is the state pension is the problem.
"The suggestion the entirety of pension payments in 07/08 was funded by the government displays either a fundamental misunderstanding of the mechanisms underpinning the private pension system in the UK, or a deliberate misrepresentation of the facts."
No it isn’t. It’s none of those things — though McPhail, who presumably lives on the charges paid to private pension advisers — may be guilty of some massive mis-statements.
First I don’t say the general assumption is that the state pension is the problem — others say that — and that’[s why we have so many reviews ion the issue.
Second, I’m not offering a straw man. I offered facts. And they’re simply true.
Third, just because pension tax relief was offered once does not mean that the future conditions for relief cannot be questioned — after all, I’m not suggesting abolishing it.
Am I fundamentally misunderstanding as a result? You’ve got to do better than that to convince me that an industry that we all know is failing to deliver despite massive state subsidies is one that deserves further state support. Because no other industry that has ever failed so badly has ever before justified continuation of a subsidy of the scale this one receives.
No come back with real answers Mr McPhail.
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He is right.
The ‘subsidies’ received by private pension funds are totally unrelated to the pensions paid out. Here’s why. I am currently paying into my pension. I decide to redirect some of my earnings into my pension plan, and the government decides that it won’t tax me now, it will tax me later. It therefore allows me to pay into my pension fund out of pre-tax earnings. I build up a fund in my name.
Elsewhere, in another part of the country, there’s someone else who has already retired. He or she has taken their pot of money and given it to an insurance company to turn that pot into income. They reinvest the pot so as to generate income over the remaining lifetime of the pensioner, protecting them from longevity and investment risk (and in some cases inflation risk too). And the pensioner pays tax on their pension.
Well, of course they do. Because a pension is just deferred income. It allows a person to defer income from one part of their life to another. This is generally seen to be A Good Thing because it means people don’t have to work until they die. And they don’t pay tax on the deferred income because they do pay tax when they finally get to receive it as pension. My tax ‘subsidy’ has absolutely nothing to do with the pension paid to a pensioner today, on which he/she does pay tax. It’s a fallacy to link the tax ‘subsidy’ to the pension in payment while simultaneously ignoring the tax paid on that pension. That’s the massive hole in yout argument.
Look at the comment “Alex” has left at the bottom of the IFA report. Hear hear!
@Brian Bradnock
Unfortunately your analysis may make complete sense from your perspective, but it does not from a macro viewpoint
There is no reason why per se saving has to be tax subsidised – much is not. Pensions are savings – at least they are at present. So there is no logic per se to the tax relief
And not taxing your capital that is saved now has a massive cost – the pay back later is massively reduced in time value terms
I agree with you the tax of the person getting a pension now is not relevant to the debate – largely for this reason that it is so limited in value compared to the tax lost when the contribution was made
But the fact they get a pension is relevant – this is the only proof we have the saving you’re making might pay
And the fact is that if it costs us £37.7 bn to subsidies a system only capable of paying £35 bn a year – and losing more value than it is creating for the remaining unpaid out as yet savers in the scheme then we need to be very worried indeed – as you should be
And in the overall macro sense what is being paid out does relate to current contributions they are all in the macro sense part of one savings scheme
There aren’t millions of individual pensions I’m afraid – just ultimately a pension arrangement
In that case we can and should ask whether this is tax well spent – given you’re not deferring consumption – you’re saving just as a person putting money in the bank is saving
And it seems it is not – because it is a hopelessly inefficient way of saving that can only exist with state subsidy
In that case it needs reform to improve it
What’s your objection to a better tax system in that case?
@Steve Coyle
I have
Apparently I am dangerous
I suspect I am to pension advisers
The same as I am to offshore advisers
But all I have done is ask three questions:
1) Why do we subsidies pensions by £37.6bn a year
2) Why can’t they pay pensions despite that?
3) Why aren’t they investing instead of speculating
No stop the ad hominems and answer the questions
@Richard Murphy
“given you’re not deferring consumption – you’re saving just as a person putting money in the bank is saving”
This is where you are wrong. Of course I am deferring income. I could spend that part of my income now, but I don’t, I put it into a pension and when I buy an annuity I convert the capital into an income stream. How is that not deferring income?
You failed to spot the difference between saving for a pension and saving money in the bank. No one has to withdraw money from the bank but you do have to buy an annuity by the age of 75 (I think).
But if a saver does withdraw their money then they have also deferred consumption – that proposition is virtually axiomatic and frankly I’m amazed you can’t see it.
But, yes, pension returns are low at the moment (what can you expect with base rate at 0.5%?) but taking a snapshot at this moment in time does not necessarily give a particularly useful view.
@Richard Murphy
(1) We’re not because you fail to take into account the tax on pensioners when the income comes out – schoolboy error.
(2) Because returns are woeful at the moment (unless you’re suggesting raising interest rates to 5-6%??)
@Steve Coyle
You’re good a ad hominems, aren’t you?
Not a school boy error on tax at all – it’s simply discounted to be insignificant – which it is over the period of deferral
And I’m suggesting investing might raise rates – at least by reducing risk, paradoxically – and cutting fees
@Brian Bradnock
An annuity is just a gamble as a way of getting a return from savings
It works for pensions by ensuring the pension does not run out – but that’s it
Some will not defer at all as a result – some will just not get!
And it remains saving all the same
The deferred income argument applies to all saving after all – someone somewhere eventually consumes after all – the fact that it may not be the person who saved makes no odds at a macro level
Sorry – you’re wrong – because you can’t see beyond your own interests
I suspect that Brian and Steve are mistaking money and wealth, a common error when looking at pensions and always leading to an underestimate of the pensions problem. Money is merely a claim on a share of wealth, it is not wealth itself. Deferring consumption now does not create stuff to consume in the future.
http://www.walletpop.co.uk/2010/10/14/massive-blow-for-pensions-due-today/