Nor does it seem to be fair.
I’d simply abolish higher rate tax relief for pensions.
let’s be honest – pensions are just a savings scheme. That’s it: no more, or less. And it beats me why the savings of most of the richest in society (and I know about the new cap for the very wealthy) should be subject to double the rate of tax relief as all the rest in society – especially when it is estimated that this costs at least £9 billion a year.
When austerity is needed the savings of the rich do not subsidy. This is one law that definitely needs to be axed.
For while there is a subsidy there, it\’s not the one being highlighted.
Here\’s what happens with pensions and tax.
You save your money into a pension fund. This applies whether it\’s you putting cash in, your employer doing it on your behalf (pensions of this sort are best looked at as delayed compensation). On the money that goes in you get tax relief on what you put in at your normal tax rate.
This can indeed be described as a subsidy.
However, when you start taking your money out of your pension, when your pension starts being paid, you pay tax on that income that comes out of it.
So the \”subsidy\” isn\’t a straight such subsidy: it\’s rather a delay in your tax bill. Essentially, you get to save tax free, and thus make returns on both your money and the notional tax bill. This is nice, yes, for it means that you are earning returns, you are earning interest, on that delayed tax rather than it being spent this year on outreach diversity advisors.
But that subsidy does get paid back: because you\’re paying income tax on what you receive in pension.
One could imagine various flavours of fairness in such a system. Save tax free, pay tax on the income received (if, for example, as a matter of public policy, we would like people to save for their pensions: which we do). Pension savings must be made from post tax income and pension income is free of tax (again, if for public policy reasons we want to encourage people to save for retirement).
We could even have save for pensions out of post tax income and have income tax on the returns from pensions: essentially, do not have a pension scheme at all. No tax privileges, nada. In effect, pensions saving is just like any other form of investment.
But it would seem wildly unfair to have a hybrid system. Where some people get tax relief on pensions savings and pay full income tax on income from a pension and others get no (or less) tax relief on savings but still pay full whack income tax on income from pensions.
Which is what Ritchie is suggesting. You don\’t get 40% or 50% relief on saving for a pension, only 20%. But you do have to pay 40 or 50% on income from a pension when you get it.
In order actually to be fair you\’d need to have a lower rate of income tax on income from pensions that didn\’t attract the original tax relief, wouldn\’t you?