I wonder if the 0.2 of a professor has considered this

As we know the Sage of Ely was insistent that the pensions credit thingie for higher earners should be abolished. Because MOAR TAX!

Apparently it might not quite work out this way:

“In the short term fiscal changes such as the lifetime allowance cap at £1m will save it money, however in the longer term the package of various measures such as the pension freedoms, the increased Isa limits and the secondary annuity market will result in a worsening of public finances.

“Investors will simply substitute more tax advantaged products such as the Isa for the pensions where they fact the lifetime allowance cap.” The OBR’s analysis looked at a series of cuts to tax breaks on pensions savings for high earners since 2010, together with the impact of George Osborne’s new pension freedoms.

The Government has reduced the annual pension allowance, the amount people can put into their retirement pots before they have to pay tax, from £255,000 in 2010 to £40,000.

It has also cut the lifetime allowance from £1.8million to £1million today.

Over a million middle to high earners including teachers, doctors, lawyers and managers will have their retirement savings restricted as a result of the lower pensions lifetime allowance.

While the reforms will benefit the economy in the medium term because of increased tax, in the longer term there will be a cost to the taxpayer as people choose to invest their savings in alternative schemes, the report found.

The OBR said that by 2035 the Government’s policies will cost it £5billion a year in lost tax revenue.

It states: “In recent years, the Government has made a number of significant changes to the tax treatment of private pensions and savings and introduced a variety of government top-ups on specific savings products.

“In doing so, it has generally shifted incentives in a way that makes pensions saving less attractive – particularly for higher earners – and non-pension savings more attractive – often in ways that can most readily be taken up by the same higher earners.”

My word, this economics stuff is difficult, isn’t it!

36 thoughts on “I wonder if the 0.2 of a professor has considered this”

  1. I take exception to this “While the reforms will benefit the economy in the medium term because of increased tax, in the longer term”

    More tax is good for the economy? Sorry, what?

  2. I don’t get it. Were there loads of better uses of money already lying about that nobody was bothered with?

    If the government is losing, even after putting themselves 20% up in the immediate term, then who is winning, and with what, and why were we all not doing that anyway?

    (As an aside, the government probably likes the idea of more cash in isas than pensions. Isas can, and will, be spent sooner. Pensions enforce a bit of discipline. Maybe the whole thing was about getting seed finance for the Bank of Mum And Dad, with loads of cash that would have been locked in a pension suddenly available for a deposit on Joshua’s first duplex??)

  3. By not using the relief on pensions now, all it does is move the tax to now rather than later as the withdrawal from the ISA will be tax free.

  4. @TimothyA – so the classic Brownian Socialism of “sod it, let’s get tax income now and spend it – we’ll work out how to pay it back later, no honest, really we will”

  5. Ah Jeez. They were banging on about this on BBC radio this morning. About how it was “unfair” that it cost basic rate taxpayers 80p to put £1 into a pension but only cost the rich 45p. No. It costs £1 to put £1 into a pension whatever your tax rate. The Government ‘not’ taking something off you is not the same as them giving you something.

    And even if you did buy into the take home pay argument then if you paid into a pension via salary sacrifice, you would save NIC which is 12% for basic rate taxpayers and 2% for higher rate employees.

  6. The idea that anyone can predict exactly how much tax people will or will not be paying in 2035 is idiotic. They can’t predict how big the economy will be next year let alone nearly 20 years time.

    And won’t the £1m pension pot limit mostly affect State employees rather than the people who are putting their own money into a fund? There can’t be many people who will build up a £1m pension fund out of savings from their income and the investment thereof?

  7. The annual allowance is cut from £255,000 to £40,000, but that’s ok because people will make it up with their £15,000 ISA allowance? Disregarding the fact that they’re different types of product (tax up front vs tax on withdrawal), the numbers simply don’t add up.

    Accounting for the time value of money, not to mention politics, it’s obvious that the government are better off grabbing the money now rather than forty years hence. The only danger is that high-earners tend also to be highly mobile, and might not stick around if their overall tax burden rises too much.

  8. @Jim ” won’t the £1m pension pot limit mostly affect State employees rather than the people who are putting their own money into a fund?”

    Therein lies an interesting point. As most public sector pensions are unfunded, there’s a rule which deems a public sector pension pot to be 20 x the pension (plus the x3 tax free lump sum). So someone getting a public sector pension of c£44,000 runs into the £1m pension pot tax limit.

    Although they can be comforted by the £132,000 tax free lump sum.

    Of course, if you did happen to have a £1m pension pot in the private sector you’d be lucky to get an equivalent pension (index linked and spouse benefits) of more than about £28,000.

    Or c£21,000 and a £250,000 tax free lump sum.

  9. Jim said:
    “won’t the £1m pension pot limit mostly affect State employees rather than the people who are putting their own money into a fund?”

    It would do if they valued final salary pensions properly, but from memory they use a highly artificial discount rate that massively under-values public sector pensions, so letting many of them escape tax.

  10. I wonder whether they’ve allowed for IHT? You can leave your unused pension pot IHT-free to the littlies, but not your ISAs.

  11. Not even sure what the point of ISAs is any more for the average person. With a tax fee allowance of £1,000 (for basic rate taxpayers) on interest and £11,100 on capital gains on shares, how many people actually benefit from an ISA these days?

  12. dearieme – why the Littlie family in particular? Can you not leave the unusued pension pot IHT-free to other families, perhaps even your own?

  13. The ever prescient Van Patten repeatedly points out that Murphy will never take account of any consequences above the first order. He is blissfully unaware of higher orders and what the ultimate combined effect of his lunatic proposals may turn out to be because he does not have the analytical equipment to even consider that such higher order effects might exist, let alone evaluate them.

    We all have synapses in our brains linking our brain cells in very complex combinations. It seems the mentally challenged Murphy is handicapped by having only a long enclosed binary loop of synapses like, oh, a model railway track

  14. What Flatcap Army said — but the rest of the sentence he quoted is even worse:

    > While the reforms will benefit the economy in the medium term because of increased tax, in the longer term there will be a cost to the taxpayer as people choose to invest their savings in alternative schemes, the report found.

    Not only is increased tax a benefit to the economy, but apparently decreased tax is a cost to the taxpayer. How did someone even type that sentence without their head falling off?

  15. Bravefart – the sad fact of the country is that there will be people who think he is right.
    While I don’t like Nigel Farage’s cult of personality I do accept his achievements. RM has a following and media attention that finds the easy answer to complex issues, that comes up with a sound bite that those ignorant of the problem can accept. That promotes a belief system regarding the real world that ignores reality in favour of what the messiah believes.
    Can you imagine the damage RM can cause over the years?

  16. Meanwhile, in Fair Tax Mark land, here is Ritchie promising the FTM 2015 accounts would be published soon as the web site is being updated.

    http://www.t*xresearch.org.uk/Blog/2016/09/25/at-labour-party-conference-tomorrow/#comment-766123

    Three weeks later, the FTM has proudly announced it’s 23rd (of 350 target by April 2017) FTM and put that on the website. No update on the accounts though.

    To use Ritchie’s standards on Facebook, Uber, etc, “what have they got to hide?” (perhaps just the fact that it’s a flop).

    For those that are interested, the “free” Fair Tax Pledge has not had it’s signup count increase from 149 since 8 May (and that was the Prophet Mohammed) so that’s worked well.

  17. Andrew C,
    If you fill up your ISA over a decade, you’ll have £152,400 plus capital growth; that could easily produce a dividend in excess of £5,000. Apart from any tax due, keeping the savings in an ISA means not having to fill in a tax return.

  18. “Andrew C
    Not even sure what the point of ISAs is any more for the average person.”

    “Andrew M
    “Andrew C,
    If you fill up your ISA over a decade, you’ll have £152,400 plus capital growth; that could easily produce a dividend in excess of £5,000.””

    What you say is perhaps true. But I doubt that the average person has c£15k disposable take home income to put in an ISA and wait 10 years before enjoying the tax saving.

    Given that the average wage is, what, £28k? Meaning a take-home of c£22k.

  19. “@Andrew M

    Apart from any tax due, keeping the savings in an ISA means not having to fill in a tax return.”

    If you haven’t been sent a notice to file a tax return, why would you need to file one if you had no income taxable under Self Assessment?

    Basic rate taxpayers earning interest before this change in the rules never needed to file a tax return.

  20. “…benefit the economy in the medium term because of increased tax…”

    Because of course, the gubmint always invests your money more wisely than you would yourself.

    Does he actually believe this?

    I suppose he does; I don’t why I even asked. Probably 75% of the country thinks so too: depressing isn’t it.

  21. “As most public sector pensions are unfunded,”

    No they’re not. The State Pension may be unfunded (and is), but public sector pensions are definitely not unfunded, otherwise I want to demand back all those employer’s and employee’s contributions that keep being taken out of the pay.

    “So someone getting a public sector pension of c£44,000”

    SPLUTTER!!!! WHO THE FUCK IS GETTING A PUBLIC SECTOR PENSION OF £44K????

    The public sector pension I opted out of would have given me about £3,500 per year. My ex-wife’s public sector pension has currently accrued £6,500 per year.

  22. Andrew C,
    > If you haven’t been sent a notice to file a tax return, why would you need to file one if you had no income taxable under Self Assessment?

    You need to register for Self Assessment if your dividend income is greater than £10,000.

    Source: https://www.gov.uk/tax-on-dividends/how-dividends-are-taxed

    I accept however that it’s uncommon to have £15,240 spare each year yet not already be registered for self-assessment.

  23. “public sector pensions are definitely not unfunded”: oh yes, they mostly are unfunded. Your difficulty is that you don’t know what funded/unfunded means. You’ve confused it with contributory.

    The only major one that is funded is LGPS. (Though maybe LGPS should be referred to as collection of funded schemes.)

  24. “WHO THE FUCK IS GETTING A PUBLIC SECTOR PENSION OF £44K????” Probably someone who earned a high final salary and had been a member of the scheme for decades.

  25. Andrew Duffin said:
    “Because of course, the gubmint always invests your money more wisely than you would yourself. Does he actually believe this? I suppose he does; I don’t why I even asked. Probably 75% of the country thinks so too”

    Despite disagreeing noisily with almost everything that almost every government actually does, he still believes that governments are the best placed to make decisions for all of us.

  26. Big public sector pensions?

    NHS are the usual ones we see – consultants on six figures salaries, for example.

    Can be quite a headache when they also contibute to private pensions out of the income from their private practices…

  27. ISAs are very useful for IHT planning: buy unquoted shares (which includes AIM), wrap them in an ISA and get not only tax free income and capital gains but also 100% IHT relief (technically Business Property Relief) after just 2 years.

  28. I wonder if Muphyloon sees the irony in his writing sparking the dissemination of tax avoidance methods here?

  29. @jgh – As pointed out by dearieme, the majority of public sector pensions are unfunded and you clearly don’t know what that means. Your contributions do NOT go into a pot for your future pension. There is no ‘fund’ you are paying into. Your contributions just go to the government of the day to do as they want with. Your future pension depends on someone else’s contributions. And taxes. At the time you are drawing it.

    @123 – in what way is an ISA useful for IHT planning in the way you describe? How is the IHT treatment different because the AIM (or other unquoted shares) are in an ISA?

  30. @Andrew M

    Don’t confuse what is on HMRC’s website with the law. You’ll find on their website that directors have to submit tax returns but there is nothing in legislation to back that up.

    The £10k level is due to PAYE regs. You can’t code out more. If you had £6k of dividend income and no PAYE income then you still ought to be filing a tax return.

    Point is, what ‘average’ person gets £5k+ dividend income?

  31. I managed to get this published on his blog. Can you credit the cvnt?

    “C Minstaines says:
    October 13 2016 at 7:52 am
    Why do you think that if a company pays its staff salaries that reduce its liability for tax, the tax take falls? Surely the tax on the salaries more than compensates.
    Reply
    Richard Murphy says:
    October 13 2016 at 8:41 am
    This is irrelevant: the staff and companies are independent agents except in the small famuly business
    Reply

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