Budget - Green paper on pension contribution tax relief

BoxerfanUK

If I heard correctly in the budget statement, a green paper consultation on scrapping all tax relief on pension contributions in favour of pensions not being taxable upon retirement.


40% taxpayers to take a big hit?


The end of salary sacrifice?


Won't this mean ultimately more people will be discouraged from putting some of the pay towards their pension? With no tax relief up front people may find other uses for their take home pay?

dunstonh

Salary sacrifice is on the radar for possible changes. The combining of pensions and ISAs into a single tax free account has been well documented by various focus groups over the years.

kidmugsy

BoxerfanUK wrote: »

With no tax relief up front people may find other uses for their take home pay?

I don't see why that is axiomatically a bad thing. You could argue that governments shouldn't be fannying around with tax shelters at all and instead should just reduce tax rates and let people decide for themselves how best to save for their old age. If they want to survive on cat food so be it. The counter argument is that some people are so dim that they need protecting from themselves. That may have some merit too.

SnowMan

Link to the Green Paper- Strengthening the incentive to save: a consultation on pensions tax relief

https://www.gov.uk/government/consultations/strengthening-the-incentive-to-save-a-consultation-on-pensions-tax-relief

A shortage of detail in the green paper. The idea does make some sense to me on transparency grounds. It is in some ways fairer in that how well you do tax wise doesn't depend so much on relative tax rates between contributing and when taking money out.

Essentially if they were to implement something like this then they would have to segregate money already paid into a pension which had been given tax relief from money paid in without tax relief. Could get very messy.

If the government gave no bonus then essentially what they are doing is abolishing the 25% tax free lump sum. So for a basic rate taxpayer there would need to be say a 6.25% bonus to make up for the loss of the tax free lump sum.

EdSwippet

SnowMan wrote: »

Link to the Green Paper- Strengthening the incentive to save: a consultation on pensions tax relief...

From the aforementioned:

2.4 The government also receives tax revenue from pensions in payment. In 2013-14, the government received £13.1 billion in tax on pension payments. It could therefore be argued that the net cost to the Exchequer from pensions tax relief in 2013-14 was £21.2 billion. However, this may misrepresent the actual cost to the government each year. ... subtracting it from the gross cost of relief provided on pensions today may not provide an appropriate estimate of the net cost.

Why not? And what would be a more appropriate estimate?

The govt continually bandies £34bn around as if this is somehow money that could be spent elsewhere. The £13bn it takes back in from current retirees is conveniently forgotten. If the 'cost' of pension 'tax relief' has been rising over the past decade, should not the govt expect the tax paid by future retirees to rise by a similar proportion? More, if the investments held in those pensions perform well?

It seems to me that the govt would rather have less money now than more money later. Achieving that aim through the trick of moving pensions from EET to TEE is possible, but it only works once. What happens when it's been played and the govt is still (as always) short of money?

Paul_Herring

SnowMan wrote: »

https://www.gov.uk/government/consultations/strengthening-the-incentive-to-save-a-consultation-on-pensions-tax-relief

Interesting how early on in the paper they talk about

1.5 The government is clear that the conclusion of this consultation may be that maintaining the current system is the most effective method of achieving the aims described above. The current system is based on a simple principle – that taxation of pensions should be deferred until retirement.

(emph mine) Then goes on to ignore the fact that it's deferral by having a whole section on:

The cost of pensions tax relief

2.3 In offering pensions tax relief, the government foregoes revenue in the form of income tax.

Which implies that it isn't deferral. (Ok - so the government of the day don't get that tax today, but it's sophistry to describe deferred income as a cost in this way.)

Ok - so they lose employer+employee NI, and any income tax on the 25% PCLS, but they're overstating the case. For example their graph

Gross cost of registered pension scheme tax relief

Why Gross? Why not use Nett? Oh - yeah - the numbers would be much smaller (comments inline here, my emph.)...

First, the income received by the government from pensions in payment will in all likelihood come from pensions which received tax relief many years ago. [well quite, that's no reason to throw it out - ed.] Therefore subtracting it from the gross cost of relief provided on pensions today may not provide an appropriate estimate of the net cost. [Then again, it may do. You either know it does and are ignoring it, or you don't and are just throwing that 'may' in there - ed] Second, tax rates of individuals may [Or may not. What are the figures? - ed] change over their lifetime and therefore the rate of relief they receive may not correspond to the amount of tax they ultimately pay on their pension.

So, lots of whatiffery in there with no numbers to back up the worst case scenarios that may(!) happen because they either don't have the numbers (guessing) or they do, and they don't support the position being implied (misleading).

Of course if they're going to include the kitchen-sink in this sort of stuff, what about

• the increase to GDP through the Pension Fund fees made on sums currently saved?
• And the tax on the profits generated by those fees.
• And the income tax+NI on the employees of those companies that otherwise wouldn't happen if the funds weren't actually there?
• And the business rates on the buildings those companies operate in
• and..

And - to balance it out - the loss of GDP through the inability of the employee to spend the money they've shoved into the pension.

But I'm sure the more astute among you many have noticed I've been partaking of a bit of hyperbole. But just a bit...



Personally I'm for keeping the scheme as it is. Throwing it all (maybe not all, but..) out and 'starting from scratch' is simply going to result in, as usual, an ill-thought out scheme in which creative accountants will find obvious loopholes that should have been seen at the start, which will then be legislated for/against, adding another 1,000 or so pages to Tolley's.

Something that's already happened with the current scheme. There is an anology in software where you're sometimes better off tweaking what you already have, since throwing it out and 'starting anew' costs so much that it can break the company producing that software.


Sorry - that was longer than I intended...

gadgetmind

SnowMan wrote: »

they would have to segregate money already paid into a pension which had been given tax relief from money paid in without tax relief. Could get very messy.

How is this any different to IRAs versus Roth IRAs?

Paul_Herring

gadgetmind wrote: »

How is this any different to IRAs versus Roth IRAs?

The country doing the administration....?

gov.uk aren't particularly famous for their trouble-free computer systems.

kidmugsy

EdSwippet wrote: »

What happens when it's been played and the govt is still (as always) short of money?

History shows that all governments go bust in the end, all default.

As I understand it, the only current sovereign governments that have not defaulted on their tradable debt (i.e. gilts and equivalents) over a decent length of time - a few hundred years - are Sweden, Switzerland and the UK. Not even the US. So how would you like to bet for the next fifty years?

kidmugsy

Paul_Herring wrote: »

The country doing the administration....?

gov.uk aren't particularly famous for their trouble-free computer systems.

Generalisations are risky, but the notion that the US federal government is a model of efficiency would probably earn derision from Americans. Hell, they've just had their computers hacked and the security details of all their employees captured.

kidmugsy

Paul_Herring wrote: »

Personally I'm for keeping the scheme as it is.

That would be my instinct too, at least unless somebody comes up with a breathtakingly attractive alternative. At the moment I can choose to save through ISAs or Pensions, and so choose the pattern of tax relief/deferral that suits me. Hurray! Or at least I could if we had spare cash; boo! But even us poor old pensioners can choose to move money from one tax shelter to another, as suits.