I am 56 this morning. I mention the fact \u00a0for a reason. Whether I like it or not, \u00a0George 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 \u00a0are designed to give my generation the greatest opportunity for tax abuse that they have ever enjoyed.\u00a0Let me offer a simple example using these new rules.<\/p>\n
Take a man of my age who is a 40% taxpayer (and yes; I am). Now suppose they decide to put \u00a310,000 into a pension when \u00a0these new rules come into effect. The actual cost to them \u00a0of doing so is \u00a38,000: \u00a0tax relief of 20% is given at source, \u00a0meaning that whilst \u00a310,000 is credited to the account \u00a0they only have to write a cheque for \u00a38,000 to achieve this result. \u00a0In addition, \u00a0they can put this pension contribution on their tax return and claim an additional \u00a32000 of tax relief. A person paying \u00a0the standard 20% tax rate can't do that: \u00a0we have a tax system that, perversely, and unjustly, rewards the pension savings of those who are already better off.<\/p>\n
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. \u00a0 This does not mean that they have to stop working. \u00a0It 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 \u00a0policy. So, with regard to this policy, \u00a0which has been \u00a0safely invested in cash in the meantime, \u00a0they can now do \u00a0a number of things.<\/p>\n
First they can take 25% of the value of the policy back, tax-free. \u00a0For the sake of this exercise I'm going to presume that the interest earned on the policy \u00a0in the year or so that it may have been invested covers the policy costs: it might not, but is not an unfair assumption. So, \u00a0on a policy that cost them \u00a36,000 \u00a0after tax relief they now get \u00a32,500 back, tax-free.<\/p>\n
Second, \u00a0they now decide to take the rest of the policy as a lump sum. Because \u00a0they are still earning they are still a higher rate taxpayer so tax at 40% will be paid on this: That is \u00a33,000, \u00a0giving them an \u00a0immediate return of \u00a34,500.<\/p>\n
Note the obvious point: \u00a0they paid out \u00a36,000 and have now got \u00a37,000 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 \u00a0setting up the arrangement \u00a0what is glaringly obvious \u00a0is that George Osborne has now set up the equivalent of a cashpoint machine \u00a0for those over the age of 55 \u00a0and it will be dispensing money for free, and for those over 60, almost instantly.<\/p>\n
If, suppose, instead of doing the above, \u00a0the person making the contribution knew they were going to retire \u00a0soon, and knew that they would then have an income which would then be subject to tax at only 20%. \u00a0In \u00a0this case the arrangement gets even better for them. Now they would only pay \u00a31,500 in tax on withdrawing the lump sum, \u00a0and will get \u00a36,000 back from it \u00a0plus \u00a32,500 in a tax free lump sum. \u00a0Now \u00a0what was, in effect, a \u00a36,000 pension contribution is turned into \u00a0an almost guaranteed return of \u00a38,500 in no time at all, entirely at cost to the taxpayer. Frankly, \u00a0in that case, \u00a0ratcheting up the contribution to the maximum possible makes complete sense, \u00a0even if it's \u00a0done \u00a0at maximum cost to society.<\/p>\n
All over the country \u00a0I can sense that there are \u00a0financial 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.<\/p>\n
There was a reason why we had a 55% \u00a0tax rate on pension withdrawals: it was to prevent this type of abuse. \u00a0That is now being scrapped. \u00a0The floodgates \u00a0for abuse will be opened, \u00a0and, I guarantee, that abuse will happen.<\/p>\n
That, though, will not be without consequence. Once governments realise their folly when making such policy changes \u00a0they tend to \u00a0have panic reactions. \u00a0In this case, I suspect, \u00a0the whole future of pension tax relief will then be brought into doubt. I should not, of course, complain: I recently proposed doing just that<\/a>. \u00a0I 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 \u00a0ill-advised as Gordon Brown's \u00a0abolition of the 10p tax rate and his 0% corporation tax rate.<\/p>\n All chancellors are at least as much remembered for their \u00a0mistakes as they are for anything positive that they did: George Osborne has just made his biggest error.<\/p>\n","protected":false},"excerpt":{"rendered":"