Yesterday the Centre for Policy Studies claimed that pensioner households that received more in income from the state than they p[aid in tax were a burden that justified further welfare reforms.
That's nonsense. But what the CPS ignored is that the cost of tax relief for private pensions is now a staggering £48 billion a year, made up of £34 billion in tax relief and £14 billion of national insurance subsidy. That is a staggering 14.8% of all income tax, national insurance and corporation tax to be collected in 2015-16. It's also about 50% of the total cost of state pensions.
The real question is why we now provide this relief when such relief can now be claimed without a person actually taking a recognisable pension that guarantees an income for life, or even by participating in a mutual arrangement where risk is collectivised, which was always been the underlying social logic of pension arrangements that justified tax relief. When, instead, pensions have become little more than another form of saving for those better off the logic of tax relief to encourage savings that the economy does not need and which do, in the vast majority of cases, simply increase the wealth divide (because only those already sufficiently well off to make ends meet can, in the main, make pension savings) makes little sense.
But the CPS, oddly, draws no attention to that fact.
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Looks like what I, and others, have long predicted, will be happening in this Parliament, namely, the shifting of focus from the working class (the cowing and subduing of which was Thatcherism Phase 1), to the middle class (the cowing and subduing of which is the current Thatcherism Phase 2).
Because, as I and others have said, the real objective of the Thatcher Project was the re-feudalization of society in favour of the super rich new Baronage, the 1%.
And here is a clear attack on those, alas, blindly supportive people, who cheered on the Government when it attacked the poor and marginalised – shamefully demonized by our “Ministry of Truth” Government as shirkers and skivers and Benefit cheats and frauds, an exercise that has truly poisoned our civic discourse and our practice of governance a social polity – never realising, the poor dumb saps, that they were next in line.
How DARE they apply a “cost benefit” analysis to pensioners, using the cynic’s “cost of everything and the value of nothing” to the question as to whether they’ve taken out more than they’ve put in?
Are we to expect us all to have “social contribution accounts”, and be subject to a geriatric “Logan’s Run”, the moment we’ve taken out more than we’ve put in?
And are we to be told this by chums of the “brilliant masters of the universe” businessmen, who manage to make a sort of success of the pensions industry (if in fact they do!), only because they’re feather-bedded to the tune of £48 billion a year?
“Pass the sick bag, Alice!”. They’re beyond contempt!
Why do you ignore the £13bn on tax paid on pension income when getting to your figure (as per the schedule you reference)? Is it because it inflates your claim? I always thought one of the aspects of pensions was tax relief on the way in and taxable on the way out. If you removed pension tax relief then taxing amounts effectively relating to capital on the way out would make pensions highly unattractive and few people would use them? In that world people would be better off in ISAs for their pensions as most people put far less than £15k a year in pensions. Private pensions would cease to exist. Is that a good thing for society?
Because that is not a cost of current releifs
It is a cost of past reliefs
Accounting says the two don’t match – and they don’t
Osborne’s changes also now mean there is no guarantee of future tax – so it is entirely right to ignore the hocus pocus claim of offset
It may be that tax collected today is for a relief afforded in the past and you would continue to receive it for historic relief, but if you stop relief on funds put in today then at some point you will also lose tax collected on money paid out – either because there is no justification for taxing a second time or because people simply won’t use a pension because it makes no financial sense. Maybe not today, maybe not tomorrow, but eventually it would have an impact.
Personally I think the biggest problem an individual should have with pension savings is knowing what rules the next government will apply.
I think we agreed that there is no option of removing tax relief for pension and retaining the current system of taxing pensions when the pensions relating to the £48bn are paid out to pensioners in the future. So the net ‘saving’ to the state would not be £48bn in any rational economic sense.
I have not anywhere suggested we would tax pensions the way we do now if they had not current tax reliefs
But we would tax last pensions that way
So the current tax receipts would continue for doms time and the reluefs could all be saved
Just as I said
Clearly there won’t be a year-on-year match between tax relief on pension contributions and tax collected on pensions in payment, not least as the relief/tax happens to individuals at different times over their working and retired lives. The point about pensions is that when you look at the accumulation and decumulation periods together then you have very long-term arrangements of 60+ years in many cases.
The UK has run an EET basis for a long time. That has been thought best for many reasons, including that EET helps to cope with an ageing population as it reduces tax revenues today in exchange for higher tax revenues tomorrow when the dependency ratio may be less favourable. All long-term guesswork of course.
If we’re going to change to TEE, or something else, then please lets do it after a lot of consideration as the changes will play out over decades. Australia went through this and it isn’t easy. Most people make inadequate provision for retirement so we should be wary of rushing any change that discourages saving further. This is a much more important decision than HS2 or a new runway at Heathrow so it needs careful consideration. Better to limit relief gradually for higher earners if you want (eg no relief at 45% and/or cut annual amount further). Then make a more radical change if necessary. But be careful to help the bulk of people to save more than they do now.
Might I suggest you read my publication ‘Making Pensions Work’?
I understand all that
I have read it. Some interesting views, but I’ve never liked the bit in the summary where you equate current year relief on contributions with current year payments. That is confusing two different cohorts and is just a current coincidence in the arithmetic. Nor calling the tax relief a subsidy when it’s just a timing difference for a scheme – depending on the longevity drag and discount rates of course.
But Osborne has emphatically broken that link now, if it ever existed
You are hanging on to a fiction
Not sure I’d say broken. It’s still effectively a consumption tax when you draw down. Some people could even end up paying more tax if they take large lump sums under the new regime. I think he IFS got this right yesterday in that the income tax is a red herring; the anomalies are on employers’ NI and the tax-free lump sum. The rest of it is just choosing whether you tax up front or on draw down, a zero sum game more or less in present value terms but shifting the cash between different periods.
There is now a high chance of no tax on some pensions
The link is definitely broken, whichever way you look
The case for relief has gone
Fine. If that’s a serious problem (I haven’t seen any estimates) then take the relief away. But it will add a lot of complexity to run two systems side by side (or three if you do it as badly as Australia did). I’d worry about the reaction of low/average earners to the complexity. Those are the people you need to keep saving.