Pensions pocket picked again

In this life, one thing counts
In the bank, large amounts
I’m afraid these don’t grow on trees,
You’ve got to pick-a-pocket or two
You’ve got to pick-a-pocket or two, boys,
You’ve got to pick-a-pocket or two.

Sung by Fagin in the musical Oliver.

“I have got to pick a pocket or two, boys” might be just what the chancellor, George Osborne, is today telling his coalition government colleagues.

For the government has just announced it is not interested in serious pension savings. Automatic enrolment, for all its hype it seems, is not there to give people a comfortable retirement. That’s the only conclusion you can draw as yet again the chancellor raids the pension piggy bank to pay for tax giveaways elsewhere.

The lifetime allowance is the overall ceiling on the value of tax-relieved retirement savings any one individual can accrue. It was £1.8m when the government came to power. We have since seen three separate cuts in the lifetime allowance to bring it down to an inadequate £1m.

Why do I say inadequate? Well Buck calculates that a 65-year-old man with a defined contribution pot of £1m, with a spouse three years younger for whom he wishes to provide a half pension on his death and who wishes to have three per cent escalation on his pension would today get an annual pension of around £33,400. Nice but hardly eye-watering.

Now I appreciate that a lot of people will not accumulate £1m in their pension pot over a lifetime, but this reduced allowance will hit a lot of middle earners, professional men and women who would have liked to retire on, say, £40,000 a year. People you would in no way describe as rich. People who in retirement will not be 40 per cent tax payers.  People who unlike the rich have to rely on their pension pot for retirement.

Going back to basics, the main objective for tax relief on pensions is to support retirement saving by encouraging individuals to save and employers to contribute to pension schemes. The government has not suddenly gone soft. With an ever-growing percentage of the population being retired, it wants people to put away enough money during their working lives to support themselves in retirement. It is deeply concerned that people will not put away enough money during their working lives and the state may have to foot the bill to support them in their old age.

Sometimes if you keep saying something often enough people begin to believe it. The story of the ‘Emperor’s new clothes’ being a classic example. I keep reading stories about how much tax relief on pension contributions is costing the government: £34.3bn a year according to the chancellor today spent on tax relief on pension contributions makes it sound as if the government is paying something out. Actually the government isn’t paying out a single penny. The whole of that £34.3bn comes from you and me and our employers out of earned income. Yes, we put that money away tax free into our pension pots. But tax-free lump sums on retirement aside, at the point we get the income from our retirement funds we have to pay tax on it. So, the Treasury will get a bite of the cherry during our retirement years. Not enough it seems for this chancellor, who would like a first bite of the cherry now.

The further watering down of incentives to save for pension is a long-term disaster for a short-term gain for the Treasury. Saving for your old age is a long-term commitment.  Constant meddling makes planning impossible and pensions seem less attractive.

Let me spell it out again for all the political parties. The lifetime allowance limits the amount people can save for their retirement tax free. While it stops abuse of the amount of ‘tax-free’ contributions that can be paid into anyone’s pension pot you don’t want to restrict it to a level that prevents middle earners effectively using a pension as their sole means of saving for retirement. If a high or middle earner accumulates much more than £1m into his pension pot then he will probably pay 40% tax in retirement, so UK plc (and the Treasury) will get its pound of flesh in due course. If he does not put the maximum amount in you can hardly complain he is abusing the system. We want everybody to save for their retirement, rich or poor.

Moreover, we want future pensioners to have enough income to drive our economy forward. We want pensioners to be able to afford holidays and buy consumer goods, because there is going to come a time when the number of pensioners will nearly equal the number of people in work, and without their purchasing power the economy will stagnate. The fact that the poor cannot save as much as the better off is not a good reason to penalise the better off by a further reduction in tax relief.

At a time when some of the economic news is beginning to show small signs of improvement, any further raid on the pensions piggy bank is both unwarranted and a cut too far. It would also be driven by a short-term desire to balance the Treasury books rather than the long-term needs of UK plc. But then how many politicians care about the future beyond their immediate term of office?

With the pensions minister (who is, by general agreement,  probably the best pensions minister we have ever had) trying to reinvigorate pensions, and with automatic enrolment beginning to make a difference, another tax raid on pensions could have a devastating impact, as people are deterred from saving. The sums are presumably based on a presumption that despite the third reduction reduction in the lifetime allowance, the squeezed middle and high earners will continue to make the same contributions to pension schemes. What will, of course, happen is that even more people will stop paying into pensions and, while the government may get a bigger pound of flesh now, it will be creating a much bigger problem for the UK in the long run. Moreover, if workers at the top of a company feel alienated from pensions, they are much less likely to provide adequate arrangements for those further down the organisation.

Danny Alexander (a Liberal Democrat MP) once told the Daily Telegraph “the country cannot afford to give you all the tax relief”. I would say in response that the country cannot in the long term afford not to.

And finally, because of the way the lifetime allowances are calculated in defined benefit schemes, someone in a defined benefit scheme, let’s say an MP, could have a £50,000 pension a year before they hit the reduced £1m lifetime allowance, while say his self-employed gardener can only reach £33,400 in his defined contribution arrangement. We are all it seems truly in it, but are we together?

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