Saturday, February 13, 2016

Pensions Crisis?

A friend posted this Telegraph piece on Facebook and I felt the urge to comment. According to the article, George Osborne is at least considering replacing current tax relief on pensions contributions and replacing it with a flat rate for all. The Telegraph takes a scaremongering tone, arguing that this will discourage the middle classes from saving, when many already face a pensions shortfall.

However, the idea that the government should not be giving an effectively larger subsidy to higher earners actually strikes me as one of the more reasonable things to come from this government. Here is where the article actually sets out, in concrete terms, the implications of the change:

"At present basic-rate taxpayers receive a £20 top-up from the Government for every £80 they pay into a pension.

Higher rate taxpayers, classed as those earning more than £42,385, receive £40 for every £60, while top-rate taxpayers receive £45 for every £55.
Under plans being considered by Mr Osborne for a flat rate relief of 20 per cent for all, savers will receive £25 for every £75 they contribute."

Since tax relief is worth more to those who pay more tax, higher earners currently enjoy a bigger rebate on their pension savings. Proposing a flat rate for all is actually a progressive measure - though one might even argue that lower earners should get a bigger rebate.

The Telegraph suggests that it would be the poor middle classes getting hit:

"It found that 69 per cent of those paying the 40p rate of tax are unlikely to have enough income when they retire. Basic rate taxpayers are also struggling to save enough for their retirement, with 62 per cent failing to put enough aside."

Those figures make it sound as if higher rate tax payers are less likely to have enough savings than basic rate tax payers. That's surprising. It turns out, however, that the goalpost (of adequate savings) is a moving one:

"Under official measures, the majority of higher rate taxpayers are considered to have an "inadequate" level of savings if their income in their retirement is less than half the salary they enjoyed when they were working."

In other words, higher rate tax payers are only more likely to have inadequate pension savings than basic rate tax payers because what counts as 'adequate' for them is higher. Someone currently earning £60k/yr is deemed to have inadequate savings if they will only have a £25k/yr pension. But someone earning £25k/yr has adequate savings if they will have a £13k/yr pension.

I'm no tax expert, but these proposals sound surprisingly progressive to me.

Disclaimer: I'm a higher rate tax payer.


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