Yes, the idiot still idiots along

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.

Sigh.

Pensions tax relief is not tax relief it is tax deferment. You pay tax on the income you get from that eventual pension.

Further, that “relief” is the not a cost associated with pensions being paid out today. It is a cost associated with the pensions that will be paid out in the future.

Thus the net cost of the deferment needs to be what tax is not collected now minus what tax will be collected in the future. At net present values if you like. Wouldn’t entirely surprise me to find that the net number is positive although I somewhat doubt it will be.

Unless and until Ritchie provides us with that calculation he’s just wibbling.

16 thoughts on “Yes, the idiot still idiots along”

  1. It probably is a net cost, because people generally have lower incomes on retirement and so, overall, their average tax paid on the pension received will be lower than the tax relief on the contributions.

    There’s also the tax-free bit that you can take out.

    Plus NI isn’t paid by those over (65? can’t remember); I can’t remember how NI on pension contributions works – is it only on employer’s contributions? – but to the extent that there is some relief and it then isn’t charged when the pension is received, there’s an element of absolute relief rather than deferral in there.

    So overall yes, deferral rather than relief, but some partial elements of absolute relief and a general weighting which means that the eventual tax rate will tend to be lower.

    However the size of the overall value of the tax relief depends on what you compare it to. If you compare it to ISA savings (which is what people would do if pension tax relief weren’t available), where the investment returns are tax-free when received and remain tax-free when you take the money out (compared to pensions where investment returns are untaxed when earned but taxed as part of the pension when you receive it), the difference starts to disappear. I did do some calculations on this years ago and there wasn’t much in it.

  2. I’m sure that Richie and Mrs Richie have already sent HMG a cheque to the value of the pension tax relief (and associated fund growth) that, ethically speaking, they should not been entitled to.

    Because otherwise this would just be a man approaching a comfortable retirement trying to change the rules to hinder the prospects of anyone else doing likewise.

  3. Great idea – discourage private saving and create an even bigger crisis in State pension provision in the future.

    Has he got as far as calling pension tax relief “tax evasion” yet?

  4. In fairness to Ritchie, since the pension reforms the deferment argument doesn’t hold true to the same degree as before.

    Previously you bought an annuity and got taxed on it, if you had the misfortune to die before a significant amount paid out the insurer would record an effective profit which itself would be taxed.

    Now with no enforced draw down and tax efficient passing through the estate, it’s quite possible to have a lot, if not all of your pension pot to be extracted free of tax. That wrinkle always existed if you had the audacity to retire and leave the UK of course.

  5. “if you had the misfortune to die before a significant amount paid out the insurer would record an effective profit which itself would be taxed”: no, the whole point of an annuity is that if you die early you subsidise those who die late. That’s the mutual, or pooling, aspect of an annuity. If the provider has got his sums right, he makes a profit irrespective of when you die.

  6. Ritchie today says he’s nearly finished writing the Joy of Tax.

    Thus admitting he’s been screwing the JRCT out of 35 grand a year for the past 5 years for nothing.

  7. seulmoi said: “That wrinkle [tax-free pension] always existed if you had the audacity to retire and leave the UK of course”

    It used to depend on where you moved to. Being UK source income, the pension received was taxable here (at least at basic rate?) wherever you were, unless the country you moved to had a double tax treaty that said otherwise.

    Hence the popularity of Cyprus for retirees, they having such a tax treaty (and a low tax on pension income).

    A bit more complicated now, since you can move your pension pot to Guernsey to stop it being UK-source income.

  8. I wonder what Ritchie has against private pensions – he basically wants to tax them out of existence (limit tax relief, invest in government bonds, FTT, etc). Was he ripped off badly on his own pension perhaps?

    Still I bet his wife will get a big final salary pension from the NHS so they won’t starve. Funnily enough, he never mentions public sector pensions.

  9. In the interests of charity, lets help Richie along.

    Pension contributions are eligible for income tax relief (at the highest marginal rate) and also avoid NI (if done through salary sacrifice for example).

    The pot will grow, attract dividends etc.

    The first 25% of the pension can be taken tax free, the rest at the marginal rate of tax, with no NI after a few years too. As the tax allowance is rising to £12,500 (Thanks Tim!), with 20% after that, most of us will pay significantly less tax on our pension out that on the savings in.

    For us to pay more tax (on a NPV basis), either the growth in the pot has to be really quite impressive (in which case do we need a higher discount factor?), or one has to save for years as a basic rate taxpayer, and then take the money out quickly as a higher rate payer. (A third option is that marginal rates are much higher in the future…ooops).

    As an example, a higher rate tax payer saves £10k pension for 5 years.This (in cash terms) will cost her £5,800 a year).

    Assuming no growth, and discounting etc. She has a £50k pot. She can take £12,500 tax free, for the remainder, unless her in retirement income is £48k+ will pay between 0% and 20% on the remainder. I.e. a max tax of £7,500. Total tax deferred £21k, total tax paid £0 to £7.5k. Looks like tax relief to me.

  10. Is Ritchie going to think through the consequences of his proposals? Or, as usual, is he assuming that they will have no effect on behaviour?

    It’s the same crap as the proposals for a financial transaction tax. “There’s a huge number! I don’t fully understand it and it might not even be real cash, but let’s tax it!”.

    Someone said he’d be a crap chess player; I think Snakes and Ladders would fox him.

  11. Dunno the figures, but I’d have thought the recent restrictions on pension size would mean that it is increasingly difficult to be subject to higher rate tax on your pension pot, if it is to last more than a few years.

  12. Bloke in North Dorset

    If they remove the tax incentive to save we need to factor in the increased benefits payments to those who piss up all their salary against the wall and rely on the State in retirement.

    Incentives matter.

  13. GlenDorran

    Who can forget the memorable exchange on banning Bitcoin or other digital currencies where his creed was revealed:

    ‘There appears to be a substantial store of wealth here and it needs taxing’

    – not so much ‘L’etat, c’est moi’ as ‘L’etat, c’est tout le monde’

  14. “Someone said he’d be a crap chess player; I think Snakes and Ladders would fox him.”

    That would have been me. S&L would get him damning the neoliberal snakes.

    “If they remove the tax incentive to save we need to factor in the increased benefits payments to those who piss up all their salary against the wall and rely on the State in retirement.”

    Second-order effect, thus completely inconcievable to our non-chess-player.

  15. Abacab

    Good analogy, except it’s the leftist snakes removing the ladders for the poor.

  16. So Much for Subtlety

    abacab – “Second-order effect, thus completely inconcievable to our non-chess-player.”

    Second-order effects are so complicated. This is a stretch but there is a link here with Ritchie’s chess playing ability and the fact that the people who work for us are actually worse. No, seriously, they are. Stupider too.

    Compare two Daily Mail articles from today:

    http://www.dailymail.co.uk/news/article-3145629/Teachers-confiscate-unhealthy-food-Government-issues-rules-carry-lunchbox-inspections.html

    Teachers are free to take – and keep – any item from pupils’ lunchboxes if they think they are unhealthy or inappropriate, the government has said.

    http://www.dailymail.co.uk/news/article-3146153/Give-head-teachers-power-FINE-feckless-parents-failing-turn-parent-s-evenings-says-Ofsted-chief.html

    Head teachers should be able to fine ‘feckless’ parents for refusing to come to parents’ evening or failing to supply books, according to the Chief Inspector of Schools.

    Sir Michael Wilshaw said he would ‘love to have the legal backing’ to allow teachers to punish parents who were ‘not supporting’ their childrens’ schools.

    Ritchie is just concerned about money. That is a relatively harmless preoccupation. We can survive an insane tax policy. I am not sure we can survive these sort of people. We fought the Fascists so teachers could confiscate Scotch eggs?

    But the link with second order effects is that we have embraced a culture of death which devalues family life and raising children. A culture of personal irresponsibility and sexual licence from the Left, a CoPI and consumption from the Right. Which is fine as far as it goes. But the end result are children from the underclass and the only solution they can think of is to micromanage everyone’s lives. Rather than continuing down this road we ought to say the place of women is in the home. Raising children who come to school and learn to read.

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