Apr 2009 22

Joined-up hypocrisy on pensions: don't even do as I say5

In one of the more mean-minded moves in his Budget, Alistair Darling has decided to claw back tax relief on pension contributions for higher-earners (those with an income over £150,000 pa) from 2011.  But the measure really comes into force from Budget Day, because the Government plans to implement regulations to penalise anyone who, in advance of April 2011, “change their normal ongoing regular pension savings” i.e. saves more into their pension.  If you now decide to save more than £20,000 per year, and you haven’t been doing so already, Alistair will slap an extra tax charge on you.

The logic behind this is pretty obvious.  Darling plans to introduce a new tax band for anyone with an income over £150,000 – originally at 45% from 2011, and now to be at 50% from 2010.  Until now, pension contributions have been eligible for tax relief at the individual’s marginal tax rate – so any one earning more than £150,000 who was worried about the higher rate could simply have paid the surplus income into their pension fund, or agreed to waive that surplus and have their employer pay the amount into the pension instead.  Both of these planning methods will be caught by the transitional tax charge.

In his Budget speech Alistair Darling claimed that “It is difficult to justify how a quarter of all the money the country spends on pensions tax relief goes, as now, to the top 1 ½ per cent of pension savers.”  But that’s what happens when you have a system of tax relief for pension contributions, Alistair: the rich receive more in tax relief because they save more, and they save more because they earn more.  The poor don’t save because they haven’t got any bloody money in the first place.

If salary sacrifice schemes are “unfair” and help only the rich, why does the HM Revenue & Customs website provide detailed advice on how to carry out a salary sacrifice in order to boost your pension contributions?  See here and here.

If Alistair Darling believes people who start to save more are nasty and have to be punished, what does he think of these irresponsible quotes from an evil financier:

“We want to build the savings culture.  That is good for individuals.  It is good for businesses and is therefore good for the country as a whole.  But of course the Government has also to foster the right economic climate to enable businesses and individuals to plan for the long term.” (Alistair Darling, Chief Secretary to the Treasury, 3 December 1997)

“We want to make sure that people on moderate and higher incomes who can save for their retirement, do so….The message that we want to get across to people is that if you can save for your retirement, then you should be saving for your retirement, because it always pays to do so.” (Alistair Darling, Secretary of State for Social Security, 6 April 2001)

“We want to encourage more people to save for their retirement” (Alistair Darling, Secretary of State for Work & Pensions, 30 July 2001)

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  • a-tracy

    If you work in the public sector then not getting tax relief is irrelevant which is why fat cat MPs like Mr Darling are happy to withdraw this tax concession that he won’t be affected by.
    Pensions should not be touched until we’re all in the same pot. One common pension scheme for all workers in the UK would stop this dipping.

  • http://alexmasterley.blospot.com Alex

    I have wondered whether there is an argument (notwithstanding what might be achieved with salary sacrifices) that cash paid into your pension fund is not to be treated as income under general principles because it is not available for the benefit of the employee. The pension rights are contingent upon living to be old enough to receive a pension and might be lost entirely. This would not have been a moot point when there was 100% pension relief, but perhaps it might be raised now.

  • http://profile.typepad.com/6p01156f4c0f2f970c altidude

    don’t forget that if MPs took their salary through PAYE rather than the expenses system, they would be caught by this.

  • Mimi

    I wonder if this is actually even worse. I understand that higher rate tax relief will no longer be given on pension contributions, only basic rate relief. But does this apply to employer contributions as well as employee contributions? For example, where an employer matches payments into a scheme, my understanding is that such payments do not currently attract NI and the employee does not pay income tax on the benefit (and the payment is more or less deductible for corporation tax..) Will this no longer be the case?

  • Call me Dave

    “We want to make sure that people on moderate and higher incomes who can save for their retirement, do so….The message that we want to get across to people is that if you can save for your retirement, then you should be saving for your retirement, because it always pays to do so.” (Alistair Darling, Secretary of State for Social Security, 6 April 2001)
    “We want to encourage more people to save for their retirement” (Alistair Darling, Secretary of State for Work & Pensions, 30 July 2001)
    meanwhile in parliament……
    Parliamentary Pensions — 5 Jul 2001 at 16:24
    “And that this House further endorses the recommendation of the Trustees of the Parliamentary Contributory Pension Fund that the accrual rate be increased to 1/40th and that the additional cost be borne by the Exchequer”
    http://www.publicwhip.org.uk/division.php?date=2001-07-05&number=14
    Yes indeed, whilst the commoners are encouraged to save more the MP’s help themselves to a massively expensive boost to their final salary pension arrangement – at the commoners expense. At a time when private sector final salary schemes were in free fall and are now almost extinct.
    Nice to see the SNP voted unanimously for more gravy please – those poor principled “innocent” peeps who are currently “victims” of the current expenses arrangements.
    The public sector pension liability is now over £1,000 billion (£1 trillion) which dwarfs the bank bail out. Does anyone give a to55??
    I don’t believe a word any of them say. This lot have been lining their pockets at our expense for years and taking us for idiots.
    PS any increase in salaries will only serve to massively increase their already obscene pension provision.
    Nice to see the public sector are still enjoying pay increases while the rest of us suffer the recession (what recession??)