MSE Poll: Should pension tax relief be halved to 20% for higher earners?

What is disappointing is the way people's opinions are so governed by self-interest.

Eg 24% of 40% tax payers agree, but 64% of 20% tax payers agree.

Clearly the idea has some merit and some drawbacks. There are arguments on both sides. It's a pity that people can't step out of their own situation when judging an issue such as this.

I can see more of this to come. You know, poor people thinking the rich should pay more. The rich thinking they pay too much already....

You missed the option of somewhere in between, why? Most proposals I have seen talk about a flat rate of 30 to 35 percent.

A couple of points:


1. the choice of language used in the media.


The government does not "give" or "top up" money in your pension pot. It merely doesn't charge you income tax (or NI, if using Salary Sacrifice). There's no flow from Exchequer into your pot. It's not a gift. It's a deferral, where you will pay tax once you actually access the money.


[Apart from non-earners getting £700 from the Exchequer on £2,900 they deposit into a pension. That IS a gift. But it's not what's at stake here].


2. Regressive rates of tax relief on pensions.
The fact we have regressive rates of relief (ie greater rates of relief for higher paid) is a direct consequence of the tax regime that is progressive ie charges high earners more in terms of rate of tax.
Those obtaining higher rates of relief are not somehow "advantaged" - it's they who are suffering the higher marginal rates of income tax and deferring (not avoiding) tax on their pension funds.


3. trust. THis for me is the big issue. Even in the short term, i have little faith in the stability of the pensions regulatory / tax framework in areas including:
- 25% tax free element
- lifetime allowance
- annual allowance
- NI on pensions
- changing the rules on when you can access pensions


There are inequalities. The different way DB and DC schemes are treated for lifetime allowance is one. The continued attacking of LTA and AA, whilst ignoring existing large pots is another. The whole concept of the LTA, where good investment strategy is penalised and long term planning nigh on impossible, is another. The ludicrous envy that has resulted in the taper rules for incomes £150,000 - £210,000 is yet another. The whole system is spectacularly over-complicated.


Touting a flat rate relief at 20% is also a fantastic sleight of hand - if you are a BR taxpayer using salary sacrifice, you are already getting 32% relief (42% if HR taxpayer), so why on earth would a flat rate at anything less than 32% be a good thing for anyone?


A flat rate relief scheme would kill pensions dead for HR taxpayers, as they would be taxed partially on receipt and fully at withdrawal ie double taxed. The rational approach would be therefore to stop pension saving (good for exchequer in the short term), but have nothing for retirement (v bad for the state in the long term).


And finally, pensions tax relief DOES NOT COST £70bn (or whatever figure) per annum. It reflects a deferral of tax, not a cost, and is essential to the long term financial wellbeing of our people.

Having been a 40% taxpayer for many years, after reading a thread on this site I decided to fund a S.I.P.P., draw a lower income and revert to 20% tax.
I accumulated a fund sufficient to retire early. Instead of the government taking an additional 20% tax and squandering it on foreign aid, my S.I.P.P. is growing exponentially.
I am currently drawing an income up to (but not into) the 40% tax bracket. Because I retired early, despite fixing the lifetime allowance, my pension will soon exceed that allowance in value.
In short, my pension contributions mean that I will never be a burden on the state. Once I have drawn the lifetime allowance I will be taxed at 55% on the remainder and the government will receive far more than they ever would had I paid 40%.
Evidently individuals can look after their own savings far better than the government.
The foolish fail to recognise that tax relief is not a gift to the wealthy, merely a deferral of when the tax is paid, leaving the adept to grow their money better than government is able. The tax I pay will no doubt be used support those who don't save for themselves.