This is an interesting point about pensions taxation

An expected tax raid by Phillip Hammond in the Budget will widen the gap between the retirement funds of public and private sector workers, a report has warned.

Analysis for the Telegraph found stripping back tax relief on money saved into pensions would hit private sector workers significantly harder than their public sector equivalents, who already enjoy far more generous arrangements.

Not entirely sure how it works but I cam see that it will increase the inequality.

Currently, to get £y in pension a private sector worker, looking at a defined contributions pension, must save very much more than a public sector worker must make contributions into a defined benefits pension to gain that same £y pension. One reasonable estimate says that this makes public sector pay 30% higher than private sector. Pensions being, as the TUC says, just deferred pay.

Remove the tax relief on private s#pensions savings, but the public sector ones not being affected in the same manner, that gap widens.

Is that it? Or would an actual pensions expert like to explain this to us?

30 thoughts on “This is an interesting point about pensions taxation”

  1. If the “Conservatives” (lol) were deliberately trying to lose the next election to Jeremy Corbyn, what would they be doing differently?

  2. Yes, you’re entirely right.

    What Hammond should do is treat public-sector pensions the same way as private-sector ones. This means using realistic actuarial tables to calculate whether the lifetime allowance has been reached, not the ridiculously optimistic ones currently used by the public sector.

    For example a public sector worker with an annual pension of £62,500 is deemed to have a pension pot of £1m, just under the lifetime allowance. In the private sector, that same £1m pot would only buy you a £31k annuity (assuming a healthy married non-smoking 65 year old retiring today, LPI-linked inflation, nothing for a surviving spouse.)

    I am not a pensions expert.

  3. What Hammond should do is treat public-sector pensions the same way as private-sector ones.

    Eh, maybe.

    But here’s a better idea: cut taxes, and cut spending too.

    How about we start with the £40Bn or so the government foolishly promised the EU in exchange for nothing?

    Then scrap the DFID and save £11Bn a year with this one weird trick.

    HS2 is costing us a pretty penny – cancel it.

    Not sure how much solar, wind and electric vehicle subsidies are costing us, but scrap the lot. Pass an Act of Parliament to prevent the troughers from seeking “compensation” – should be a teachable moment for fake businesses considering living off the public purse in future.

    Anything else?

  4. It’s even more extreme than that, Andrew. For most civil servants it’s retirement at 60*, with 50% to surviving spouse, which would buy you an annuity of around £25k. Which gives the lie to the idea that someone with a million pound pension pot is somehow ‘wealthy’.

    * or even earlier if you can demonstrate a health problem, such as ‘stress’.

  5. And the 3x tax free lump sum.

    There maybe won’t be that many public sector workers on £60k pension but there will a lot on around £40k. And they’d also get £120k tax free as a lump sum.

    And as mentioned, that’s at 60 and with spouse benefits.

    I’m sure I read somewhere that a public sector worker gets back in pension + lump sum the equivilent of all the deductions from his salary inside 4 years of retirement.

    Can’t blame them for wanting to keep them but they are so fucking sanctimonious about it.

  6. And anudder thing: if the goal is to increase tax revenues through economic growth while reducing public spending liabilities (obviously it’s not, but it should be) – the US, Mexico and Canada just signed a big, beautiful trade deal called USMCA.

    Nota Benny – unlike the interminable, bad faith EU negotiations, they got this done in a matter of months despite major objections from Canadia.

    Four days ago the senior US trade envoy confirmed he’s under instructions to commence talks with Britain “immediately after Brexit”.

    USMCAUK is a bit of a mouthful, but wouldn’t it be lovely to have free trade with the biggest market in the world? All of the upside (jobs, growth, cheaper living costs) with none of the superstate.

  7. USMCAUK is a bit of a mouthful, but wouldn’t it be lovely to have free trade with the biggest market in the world? All of the upside (jobs, growth, cheaper living costs) with none of the superstate.

    But muh, Clorinated Chicken!!!

  8. Two OECD economists ( Fournier and Johansson ) analysed the mix of public spending in 2016 and concluded there were 2 items with multipliers significantly less than one. One was government provided pensions.
    Scrap ’em, and let people make their own arrangements.
    PCGC excepted of course, which is basically welfare ( i.e. means-tested ).
    Of course, the current pension pot limit doesn’t stop you from going over it, you just pay income tax first, and the residual can be added to the pot. So long as you don’t pay tax again when you draw it out, all would be fair imv.

  9. The variance between public sector and private will be that more of the money comes from the employer in the public sector. The amount from the employer is not subject to tax and hence tax relief.

    Under current rules you could avoid the change by salary sacrafice but that only tends to be done by larger employers

  10. Steve

    If the “Conservatives” (lol) were deliberately trying to lose the next election to Jeremy Corbyn, what would they be doing differently?

    Oliver Leftwing has thought of a new wheeze to try and confiscate gains from private property?

    https://www.telegraph.co.uk/news/2018/10/20/landowners-forced-sacrifice-profits-affordable-houses-plans/

    This sort of happens already lots with all the S106 crap. I can’t read the detail (paywall) – but presumably that’s not currently enough for proper modern Conservatives?

  11. There are even thoughts from some fvckwits about a wealth tax levied on assets including your pension pot. I assume Murphy would approve.

    If Hammond does what is predicted and penalises private pensions in some way, I will never vote Tory again. Although I don’t know how I would vote – probably spoil the ballot paper

  12. In the long run, salaries will adjust to make either job equally attractive. Don’t worry about it.

    Assuming a perfectly rational workforce, perhaps. But in practice the 2014/15 pension reforms (replacing final-salary pensions with career-average) haven’t made a meaningful change to public sector employment.

    The corollary is that the government could slash further with no ill-effects.

  13. There maybe won’t be that many public sector workers on £60k pension

    ITYM almost none.

    but there will a lot on around £40k.

    Wrong again.

    And as mentioned, that’s at 60

    That’s wrong too (though it was true many years ago). Civil Service pension age is now 66 (and will rise to 68). Local government is at least 65 (tied to state pension age). Median Civil Service pension in 2009 was around £5k, median local government was around £3k.

    They are no longer final salary schemes – pension is based on a career average – so not as advantageous as they used to be. It’s still a great deal, and the employer contribution is pretty large at 20% of salary (maybe more in some areas). But the overwhelming majority of public sector pensions just aren’t that big.

  14. The inequality comes from two things:

    Firstly DB pensions have a much bigger employer contribution than DC pensions. So it’s easier for them to build up a big pension.

    Secondly, when calculating the value of a DB pension for the purposes of applying the lifetime pensions limit, the conversion rate is stupidly low. So it massively undervalues the value of a DB pension compared to what you would actually have to pay if you had to buy it on the open market (as DC pensioners do, by buying an annuity). The conversion rate is so stupid, it means that a DB pensioner can retire in luxury without tripping the lifetime limit, but a DC pensioner would have to pay extra tax because of the lifetime limit on a worse pension.

  15. There are even thoughts from some fvckwits about a wealth tax levied on assets including your pension pot. I assume Murphy would approve.

    Large sums of money tied up for decades, basically a combination of catnip and sitting duck for Governments. I’d be surprised if they didn’t attempt to steal it.

    The only form of saving which is safe is buying a house far bigger than you can afford and hoping it will keep rising in value (not exactly a gamble in the past 40 years).

  16. The Taxpayers’ Alliance has (have?) a paper which explains the current situation rather well. It’s even worse than my back-of-the-envelope calculations: a public-sector employee making the same pension contributions will enjoy a pension 2.75x greater than a private-sector employee, and that’s without taking into account the government’s risk-free guarantee on public-sector pensions.

    Link: https://www.taxpayersalliance.com/pensions_inequality

  17. “median local government was around £3k.”

    Do you work for Unison, Pete in Whanganui? This is the typical propagandist drivel you expect from them. Local government (and most other public) average pensions appear so low as the average local government worker only contributes (e.g. is only employed for) 7 years or so, many of whom are part-time.

    A less bullsh*t measure would be to compare over 30 years of full time employment or the accrual rate. These figures would be many multiples higher against a private sector pension.

  18. @aaa nailed it. Huge Employer (read “taxpayer”) Contributions of 18 – 25% of salary, compared with a statutory 4% in private sector DC schemes.

    Until a few years ago I lived in a place where the Council’s revenue from Council tax was insufficient to cover the “employer’s” contribution to the pension scheme. Things get even more stupid when you look at the generosity of the Police schemes – example, a Det Chief Insp with 20 years who’ll retire at 52, and who received recently some illustrative figures – c. £250k tax free cash and an actuarial fund value of £1.4m., but with guaranteed indexed benefits (£36k a year for starters) for the 40+ years he / his spouse might expect to live. Complete lunacy, before you count in the 12 years military pension which he accrued before the Police.

  19. The life-time pension pot limit is already leading to unintended consequences in NHS – many doctors/surgeons taking early retirement. Extra tax resulting iin Tim’s “gone fishing” analogy.

    In other news: £1bn black-hole in stamp duty due to tax hikes. Will Hammond cut upper rates or increase lower rates?

  20. “@Pete There maybe won’t be that many public sector workers on £60k pension

    ITYM almost none.

    but there will a lot on around £40k.

    Wrong again.

    And as mentioned, that’s at 60

    That’s wrong too”

    Well, I can’t be “wrong again” if I was right that there aren’t many on £60k pensions.

    From the gov pension page –

    “Normal Pension Age in classic, classic plus and premium is usually age 60”

    If you were 10 years or less from retirement in 2012 you were not moved onto the new “Alpha” scheme. That’s many 10s if not 100s of thousands of people so you’re talking shit.

    As for a £40k pension, that’d be anyone at principle grade 7 civil service. Any teacher who was head of a big department. A certified nurse midwife would get that. So again many 10s or 100s of thousands. More shit from you.

    The £3k pension average? More shit. Includes pensions of people who might have worked part time for a couple of years for local government.

    If you want to be able to get away with shit statistics that support a shit argument you need to go to the Spud-U-Tax website.

  21. “It’s still a great deal, and the employer contribution is pretty large at 20% of salary (maybe more in some areas).”

    The only big government-employee scheme with a large employer contribution is the LGPS. The other big schemes are unfunded.

  22. @ Chris Miller
    For most civil servants future service pensions are from state pension age but the generosity of the new “money-saving” Local Government Pension Scheme means that anyone joining on leaving school and nevere getting promoted will get a pay rise (even ignoring NI contributions) when he/she retires.

    @ dearieme The Employer contribution for LGPS should, at current interest rates, be well over 30%, for most employees it is over 40%. The employer contribution to other schemes exists even thoughit is hidden from the tax-payer.

  23. @john 77
    I believe you’re right about pensionable age for civil servants stll working. but those retiring today (who are the ones with the largest notional ‘pots’) will mostly still be doing so at 60 (or even earlier).

  24. MarkC: Council Tax is a red herring, *on* *its* *own* it’s bearly enough to cover *anything* as it only forms about 10% of a council’s income.

    To throw some real numbers into the pot, my ex-wife has worked in local government for 20 years, is currently on about £25,000, and has accrued a pension that will pay out £8300pa in today’s money.

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