…and how not to save pensions
There are rumours that the Chancellor is to take further action against higher rate pensions tax relief in the PBR on Wednesday. The commonest version seems to be that those earning more than £100,000 will only get tax relief at the basic rate.
As with any other proposal to raise more tax from top earners, there have already been howls of protest. Indeed if your read the personal finance pages of newspapers like the Telegraph, one would think that all their readers were in this income bracket.
This says that if the tax relief enjoyed by company finance directors is cut, then they will take this out on their staff by cutting their pensions. According to the Guardian report:
Mark Tilley, a senior pensions adviser, said boardrooms would become less inclined to support workers’ pensions if their own retirement investments were in other tax-efficient savings plans. He said: “Managers are less focused on pensions for workers when it has little relevance to them. It’s human nature.”
It is hard to know where to start with this argument. It is so wrong in so many different ways.
- Managers have been cutting pensions without any changes to pensions tax relief.
- Does Mr Tilley think that cutting pensions would only occur to finance managers if their own tax relief is cut?
- If true, it is a fantastically expensive way to prop up pension provision – and it clearly hasn’t worked, as pensions have been cut.
Let’s look at the sums. The cost (at the moment) of higher rate pensions tax relief is about £20 billion for higher rate tax payers and £10 billion for the two per cent who earn more than £150,000.
ONS has stopped producing figures on the number of occupational pension schemes as they don’t think their survey measures them properly. But in their 2007 stats they estimated that there were over 28,000 open occupational pension schemes, but only 5,000 had 12 members or more.
There are problems with these figures – and as I’ve pointed out before, they do not include employer supported group private pensions.
But bear with me for a ball-park figure.
I work out that there is two million pounds worth of tax relief being paid to the top two per cent of tax payers for every open pension scheme with 12 members or more.
It’s expensive – and it isn’t even working.