I wholeheartedly agree, except for the fact that pension tax relief costs £54 billion a year because it is wholly inappropriate for HMRC to suggest that current tax income from pensions can be offset against the current cost of pension contributions that will give rise to future pension payments.

The savings that went into building those current pensions gained tax relief didn’t they?

20 thoughts on “Err, why?”

  1. There are those who enjoy pointing out that you don’t really avoid tax with pension contributions, you only defer it. There are those whose riposte is that if you defer the income to a stage of life when you pay a lower rate of tax you really have avoided some tax.

    Apart from that my only comment is that his sentence is one of the worst I’ve seen for a while.

  2. “There are those whose riposte is that if you defer the income to a stage of life when you pay a lower rate of tax you really have avoided some tax.”

    How does this work for individuals with decent but not ultra-high – say top 5-10%ish – net worth? You don’t need an absolutely outlandish pension income to get into the 40% rate tax band, in which case very little tax has been avoided. There’s the tax-free lump sum but that’s rarely advertised as the main benefit of pension schemes.

  3. I’d be happy to give up pension tax relief, and the making of pension contributions, if I get a gold-plated public sector pension like the cvnts in the First Division at Whitehall that I pay for. Their pension funds have not been affected by the COVID fiasco.

    I’ll ask again – exactly what retirement provision has the fat fvcker from Ely made for himself? He hates landlords, he hates pension funds, he hates ISAs?

  4. “There are those whose riposte is that if you defer the income to a stage of life when you pay a lower rate of tax you really have avoided some tax.”
    Even as a basic rate taxpayer pleb I have access to:
    1) “Smart Pension” where I don’t pay NI or TAX on any of my pension savings.
    2) 25% tax free lump sum.
    I will be on the basic rate before and after my imminent retirement, and it’s definitely still worth shovelling as much as possible into my pension.

  5. @MBE: why would it depend on their wealth? It’s just a matter of annual income.

    “You don’t need an absolutely outlandish pension income to get into the 40% rate tax band, in which case very little tax has been avoided. There’s the tax-free lump sum but that’s rarely advertised as the main benefit of pension schemes.”

    Minor point: on the contrary, the TFLS is one of the best appreciated and widely known feature of pensions. That’s probably why it survived “Pension Simplification” (Brown) and “Pension Freedom” (Osborne).

    Major point: you seem to be confusing average and marginal tax rates. Somebody who deferred 40% tax on the way in and pays a mixture of 0%, 20%, and 40% tax on the way out has clearly avoided tax.

    @NDR: you’re just repeating my point – you avoid 20% + 12% on the way in and will pay a mixture of 0% and 20% (or whatever it is at the time) on the way out. So you avoided tax.

  6. @dearieme: “Why would it depend on their wealth? It’s just a matter of annual income” – because once you’re no longer earning income by work, your unearned income is highly dependent on your wealth. And you don’t have to be obscenely private-jet private-island level wealthy to be making investment returns of, say, £50k-100k a year. People who say things like “I’ve got a couple of buy-to-lets as my pension” might not be quite right legally in terms of the specific benefits/exemptions that come with having these things wrapped up in a pension, but they’re conceptually correct that it’s a stream of income once they’ve given up the day-job. And they might be looking at making that kind of money. Re the marginal versus average rates thing, that might be pretty much irrelevant for someone with a couple of million in wealth if their income-generating assets outside their private pension, plus the state pension, already plonk them up to the 20% or 40% rate.

    I’ve slightly tangled my wording – yes it’s true tax-free lump sums are advertised by private pension scheme, but I don’t think that they’re completely appreciated, in a more conceptual sense. Ask most people what the point of a pension is and they’ll talk about in terms of a stream of income in retirement, which is why the BTLers, for example, see their rental properties as “a pension”. Assets in an ISA generate an income too, a lot of people don’t seem to conceptualise a “proper” pension as basically just another wrapper but with a different set of tax rules, and therefore the TFLS as an absolutely fundamental part of that. Similarly a lot of people are still put off private pensions because of the risk of them doing an Equitable or similar, rather than seeing that as a matter of what goes inside the wrapper. (Disclaimer – my perception of other people’s comprehension is largely anecdotal, but distrust of private pensions is rife among most people I know, and seeing it as a wrapper rather than just “anything that gives an income in retirement” really doesn’t seem to be widely understood.)

  7. Pensions also allow you to defer the tax on investment income along the way – that is, if the market return is 6% in a particular year you will earn and retain that 6% in a pension plan; in a taxable investment account you will earn 6%, and then lose (say) 40% of that in taxes – so your realized return is 3.6%. In a pension scheme the government allowing you to retain and invest “their portion” of this year’s returns next year, and every year following until you start drawing it out. As compared to a taxable investor, the government is giving the pension investor an interest-free loan on the tax that would have been paid by a taxable investor.
    Over time, the effect of deferring taxes on investment gains is comparable to that of allowing a before-tax contribution.

  8. To reinforce what Brave fart said.
    The only equitable thing to do with pensions now is that all public sector pensions must be valued at what they would cost if you rocked up at L&G or Fidelity and got a quote for what an income stream like that would cost. They are then taxed according to exactly the same pension rules as govern DCS schemes.
    This has several benefits:
    Transparency both for govt accounts and taxpayers.
    Transparency- public sector workers would see how much they are valued in comparison to the private sector.
    Fairness- cos we’re all in it together of course.
    Fairness – DCS schemes are overwhelmingly the option of the private sector and this would be an option for the public sector to see how a private sector pension scheme works.

  9. @MBE: it really is easier to say “Fuck me you’re right” rather than write such a load of drivel.

  10. “And you don’t have to be obscenely private-jet private-island level wealthy to be making investment returns of, say, £50k-100k a year”

    So a savings pot between £1.25 and £2.5m. A mere 200 years saving of maximum pension contribution for someone on £50k. Easily affordable in my book

  11. @ Diogenes

    Not saying your maths is wrong but either that or your sentence has some level of error.

    £1.25M / 200 years = £6,250 per annum which is not the maximum pension contribution of someone on £50k (you can contribute up to the lower of either £40k or 100% of earnings).

    Roughly £500 per month is probably the realistic pension contribution for someone on that salary taking into account other outgoings they are likely to have however. Most likely this is what you meant.

  12. The savings that went into building those current pensions gained tax relief didn’t they?

    They did until Blair and Gordon Brown taxed pension fund income and the “Conservative Party” MPs have not reversed this abhorrent action

    Same applies to Private Health Insurance tax deductible being abolished by Blair and Gordon Brown: 20%-40% tax relief and NHS ‘saves’ 100% of cost – vindictive, spiteful and counter productive

  13. @dio

    Someone on a salary of £50k without a stonking heap of assets is a good example where the logic of pensions as “tax deferred means tax avoided” makes perfect sense, because they’re almost certainly going to be dodging tax at one tax rate and paying it at a lower one (aside from the point that @dcardno made). But having a couple of million of investments by the time you’re near retirement, while it puts you in the fortunate minority, isn’t outlandish. It’s not even the kind of wealth you need to have been especially entrepreneurial to acquire, a salaryman with good financial self-discipline might get there quite comfortably without needing to start a business of their own.* There are several million UK millionaires and that’s going to be quite concentrated among those at or nearing retirement. A third of households headed by a 55-64 year-old had assets over £1m in 2018, and bearing in mind how skewed that distribution is, there’ll be plenty with a couple of million. Looking at the next graph, interestingly more of that is from private pension wealth than property wealth. From Table 2.2, the top 10% i.e. 2.6 million households across all ages had an aggregate wealth of £6.52 trillion between them which is £2.5 million per household (and again, this wealth section will represent far more than 10% of 55-64 year-olds), with the next decile at all ages averaging just over £1m (ditto).

    The people in that top 10% group have millions in assets outside their private pension (you can see this from the aggregates in table 2.2). I think it’s pretty clear that if the cross-tabulation was available to pick out only the top 5%ish of of 55-64 year-olds, who are considerably richer than the top 10% of the population as a whole (see table 2.11), they’re going to have several million pounds of income-generating assets outside their pension. Obviously this is per household and since they’ll mostly have more than one adult in that age bracket you need to split it again, but we’re still talking about people who are likely already over several tax thresholds by way of investment income even before we throw their pension income into the mix. So the idea they built up their private pension wealth primarily because “tax deferred is tax avoided since you’ll fall down the tax bands” doesn’t look right to me, they’re still going to be paying 40%+ (or whatever the relevant rate happens to be when they retire, which is a something of a political lottery) on all or almost all of that pension income. And yet they’ve still chosen to invest heavily in their private pensions. For that to make sense I think requires alternative explanations, like @dcardno’s and the pure “tax avoided completely” of a tax-free lump sum.

    *I wonder what the cross-over point is in the wealth distribution, below which you were more likely to have largely earned your fortune through employment, and to the right of which you’re more likely to have made it through entrepreneurship. Can’t imagine many people with £100m in assets will have got there by just sticking at the day-job. If you want £10m and you’re not a world-class footballer, musician, lawyer, banker or a handful of other jobs with “tournament wages”, your best shot is probably going into business. If you reckon a cool £1m will do you fine and you’ve already got a decent professional career, I reckon you’re probably best to just slog for a few promotions, trim your outgoings and scrimp and save to invest what you can – chucking it all in and trying to make it big yourself is a higher variance option that might increase your chances of getting to the £10m mark while also increasing your chances of falling short of £1m.

  14. Thanks Mr Yan, my knowledge is out of date. But not many people will ever build a pension pot of over £1m,even if they put in £40k per year. Do you agree that the substantive point is justifiable?

  15. @ Diogenes

    Average pension pot in the UK is £30k. Men at £75k and women at £24k. Also large regional variations with the SE at £90K and £20k across the rest of the UK.

    So, the likelihood of the average person getting near a £1M pension pot is zero despite the numbers quoted by MBE.

    That said, paying in £500 per month over 40 years and including inflation growth of contribution and also growth in investments should get you to somewhere around £1M+ in your pension by retirement.

  16. @dio

    There are geographical tables in that spreadsheet showing a lot of the wealth is concentrated in the South East and London but there seem to be millionaires beyond that too. There’s also a breakdown by employment but that’s not very enlightening, as one might expect there are few in routine and semiskilled jobs and quite a lot in managerial.

    I think the question is somewhat related to those poshish schools – not the Etons and Harrows but a few rungs down – with school fees of £20k a year. Even around the poorer corners of England you’ll find them, and families sending two or three kids there without scholarship. How do they manage that, you might well wonder? But even if you don’t see the how or the who, clearly someone’s paying. And given about 7% of kids go to private school, there’s likely a lot of crossover between this group and the wealthiest 5%ish I was thinking about.

    Re the pension pot you can put together in a career, you have to account for the compound growth of the fund too.

  17. Ten years work in a university pays me a pension from age 60 of ~£6,000pa
    Pension pot paid into long ago and since dormant ~£25,000; projected pension around £650pa
    State pension £9,141pa, defer claiming for one year and gain an extra £530pa.
    So, a rather better annuity rate from the state pension than the private pot.

  18. @ Mr Yan
    Since more men than women have pensions it is not possible that the male average is £75k, the female average is £24k and the overall average is £30k.
    Either you mean median pension not average pension (even then it’s implausible) or you’ve made a typo.

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