The Worstall Consolidated Theory of Pensions

Middle-class savers are to lose thousands of pounds of tax relief when saving for a pension but will not have to pay tax when they retire, under radical plans set to be unveiled in the Budget.
The controversial proposal will mean that higher-rate taxpayers will lose valuable tax perks during their working lives. However, they will be able to withdraw their lifetime savings tax-free after retirement.

The proposal has sparked a Government row with the pensions minister warning that it threatens to undermine the system by removing the tax incentives for pensioners to keep money in their pot. It would allow George Osborne, the Chancellor, to save more than £10 billion annually in the coming years – although tax receipts would then fall in decades to come.

The extra money could allow Mr Osborne to reduce higher rate tax or increase the tax-free personal allowance. It will also allow him to clear the deficit.

There never will be a stable pensions system. Simply because politicians hold office for a decade at most and pensions are saved for and then drawn down over an entire adult lifetime. This causes an incentives mismatch. Any system of reliefs and or taxation which encourages significant savings then becomes an irresistible pot for some future Chancellor to raid.

The End.

20 thoughts on “The Worstall Consolidated Theory of Pensions”

  1. Surreptitious Evil

    It’s lasted for a few decades up to now. Well, okay, up to Gordon.

    Are our generation of politicians just more cnutish than previous?

    I doubt it (cf income tax). Maybe it is the improvement in comms and the 24 hr news cycle that drives political types to the full expression of their phenotype?

  2. The lumbering of final salary schemes with lots of new compulsory liabilities happened before Brown. Once upon a time (i) there was no widow’s pension (ii) no index-linking (iii) if you left your employer your FS pension evaporated – no deferred pension for you.

    The reforms were each desirable, but each piled costs onto the schemes. Now we have far fewer schemes. When one or two huge ones crash we may no longer have a Pension Protection Fund either.

  3. When you enter into a contract, you cannot change terms when you feel like it, but those politician cunts never stop doing so. There should be a principle that whatever changes a government brings should only apply to new entrants, unless the changes are beneficial to the other side or the other side prefers the new terms.

  4. @monoi – it’s that which gives the lie to the “social contract” thing. What good is a contract that you’ve never signed, can’t read, and that the other party can change unilaterally and has sole power to enforce?

  5. Worstall’s Theorem is supportable. This is a revenue – raising measure. It can.also be called ‘redistributive’. So Ritchie must wriggle like the eel he is to find a way to criticise. So, as far as Osborne is concerned THE END.

  6. Ausburke –like his treasonous mentor Mr EU Pig-Fook–is scum from the top of a very nasty barrel.

    Only a few decades ago could anyone have imagined a so-called Tory pulling such a stunt? And this clown wants to succeed his bum chum as PM?

  7. Yes, any long-term investment is a sitting duck for politicians.

    My prediction is that the government will abolish the right to withdraw the sum tax-free in a decade or so, after a three month media hate campaign has whipped up the masses.

  8. This is actually a result of Corbyn’s election as Labour Leader. The Tories now believe they can do absolutely anything they want, and their followers will just fume, knowing that the alternative is Corbyn.

  9. The problem is that if you make pension schemes look bad for people who earn more money (who are generally the people who run the pension schemes and make decisions concerning them) then you’ll remove any incentive for any company to provide more than the absolute minimum.

    Those on low money may be a lot better off with the new legislation (not really relevant in this case) but if all of the pension schemes vanish, it doesn’t actually help them.

  10. Brown was the problem.

    My main reason for voting Major in 97 was his attitude to pensions (he very clearly respected the whole concept).

    A decent private sector pension meant achieving “private means” at a certain age, and all the independence that goes with it, regardless of your income status.

    Brown couldn’t have that, and couldn’t resist the money either.

  11. @dearieme – Your points may well be valid, but the real problem with final salary schemes (or ‘defined benefit’ as they’re described these days) is that they rely on being able to work for substantial periods of time (10+ years, preferably 20+ years) for the same employer. When I started work in the 70s, it wasn’t unreasonable to think that if you liked your employer and they liked you, you could stay with them until retirement, today almost no-one thinks in these terms (unless you’re working for the government, and probably not even then).

    If you change jobs every few years, you’ll be left with a series of small pensions, that aren’t likely to end up as equivalent to one big pension. In theory pensions are transferable, but the two actuaries at each end of the transaction are required to take opposing views of future investment performance, longevity etc, and so the effective ‘costs’ are usually insupportable.

  12. Yes, that’s the problem from the point of view of the employee, and accordingly cuts the ability of a DB pension to attract and retain staff. But from the point of view of the employer, he not only finds DB pensions less attractive as attractors and retainers, but more costly because of compulsory add-ons, and more costly again, because of increased life expectancy; moreover the probable high costs are unpredictable in detail too.

    From the point of view of the employee, he might actually have found that a handful of DB pensions into which the employers have paid (say) a nominal 15% p.a. and the employee an actual 5%,would prove more valuable than a DC pension into which each has paid 5%,which and has had to cope with market ups-and-downs.

    But it’s all beside the point: DB pensions are dinosaurs. Even the state ones will presumably be put down in the end.

  13. Is it so clear that what Osborne is proposing is bad for pensioners?

    In recent years the left have been making bigger gains, either by winning election or by winning mindshare. The latter is the reason this Tory government is behaving in a relatively left wing fashion. That means tax rates in the future are likely to be higher than they are at present or in the near future.

    So, which is better? Tax relief on a pension now or tax relief later on? If the tax relief later on is maintained as a policy then it looks attractive to me. The problem is maintaining it as a policy, as Tim points out.

    The counterpoint to Tim is tax free sale of a person’s first home. That policy has lasted a long time.

  14. If there is one thing that I have learned since getting the vote, it is that all politicians, of whatever party, are cunts who were bullied at school and so are now getting their own back on the world.

    Anybody who is expecting to rely on a State, or private, pension when they retire is quite simply a moron. Politicians will slowly get rid of State benefits and then start raiding private ones even further. The only sensible thing to do is to invest the money as far away from the cunts that run your country as you can – sort of a reverse invisible hand.

  15. In practical terms, what should we be doing? Moving our existing pension funds to Switzerland just in case? Is that even an option?

  16. @ dearieme
    (i) The good schemes had a “widow’s pension” option – the guy could opt to surrender part of his pension to provide one for his widow. When I hit 40 years I asked to do this surrender and was told that since I had been made redundant my pension had been enhanced by an autoatic widow’s pension of 50% of my pension. So not an invention just an addition at no cost to the employee (or, in my case, ex-employee)
    (ii) My deferred pension was index-linked. So you are not wholly correct. But someone then said “bad leavers” should get index-linking as well.
    (iii) WTF are you talking about? If you left your employer OF COURSE you got no future service pension from it. Future service pension would be the responsibility of your new employer.
    If you want to talk about PSP, then then nearly all mployees got a deferred pension in respect of past service *unless* they opted for a refund of their contributions.

  17. @ Chris Miller
    There is a massive difference between most DB schemes and the final salary schemes that are now mostly limited to the public sector and oil companies.
    I used to value schemes where the individual employee had a defined benefit of, for instance, £14 per annum. The guy had a guaranteed income but it had no relation to his final wages (sadly he was completely screwed by the 1974-9 Labour government).

  18. “But it’s all beside the point: DB pensions are dinosaurs. Even the state ones will presumably be put down in the end.”
    And how long did dinosaurs rule the earth? Compared to humans?
    DB Pensions are the right answer – and they cost less than a DC pension providing the same amount. BUT someone has to be willing to make the effort.

  19. @john77: you’ve got the wrong end of several sticks.

    (i) “So not an invention just an addition at no cost to the employee”: you’ve missed the point. The government made a widow’s pension compulsory, so schemes that hadn’t had to fund them suddenly did.

    (ii) “My deferred pension was index-linked.” How nice for you. But the point was that the government made index-linking compulsory, so schemes that hadn’t had to fund it suddenly did.

    (iii) “WTF are you talking about? If you left your employer OF COURSE you got no future service pension from it.” Again, you’ve misunderstood. Once upon a time if you left a final salary scheme to move employers, your rights in the old scheme normally evaporated. There was no compulsory deferred pension. All that money you’d paid in went “pouf” and was no more . It was a Norwegian Blue. Gone to meet its maker.

    I realise that you may well be drunk, but surely you must be capable of realising that your experience on (i) and (ii) has no bearing on what happened before your experience, in an earlier era. On the third point you’ve simply been stupid: reading comprehension failure.

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