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BeeHive  >  BeeLines  >  2009  >  April  >  My Nervousness Concerning this Week's Events

My Nervousness Concerning this Week's Events

When we save in a pension the deal is that we only get taxed once on our income. It doesn’t sound like much of a deal, I know, but it’s one that we all understand and it’s something that people value. It’s a principle that’s at the heart of what pension saving is all about.

The idea that the Government is somehow ‘giving’ us something when we defer consumption now in favour of consumption later in life is wrong; we are ‘given’ nothing when we get tax-relief on our pension contributions as we make them.

Think about this; if Alastair Darling, Gordon Brown or any other Chancellor says to us “If you save in a pension I’ll guarantee you’ll only be taxed once on your money” how can we know we can believe them?

One way they could seek to keep that promise would be to ask us to save from our already taxed income and guarantee that our pensions would not be taxed by a future Chancellor when they come into payment decades hence.  No-one would believe that promise; you would be seriously stupid to save in such a system as there would plainly be a high likelihood of being taxed twice as a reward for the socially responsible act of deferring your income.

The only way a Chancellor can demonstrate they mean it when they say they will only tax our incomes once is to allow us to pay no tax on the income we choose to defer until we draw it as a pension later in life.  Up front tax relief on money put aside for pensions is not a gift from generous government ministers, it is the only way we can be sure they won’t tax us twice on our income.

There is a second tax issue with pensions which confuses this argument and that is that a portion of the deferred income is allowed as a tax- free lump sum that can be drawn later in life.  This is a right pension savers have due to the historical roots of or pension system. It is the only real tax advantage of saving for a pension and is, I think, a justifiable reward for those who are good enough to voluntarily defer income to provide for themselves in retirement. There may be good reasons for limiting this benefit, as the 1987, 1989 and 2006 legislation all sought to do, but not for removing it.

The changes that were introduced in the recent Budget have made a worrying and fundamental change to our pension system.  Whatever we might personally think about high-earners and whether or not their earnings are justified is not really relevant; we now have a system that says it is OK for some people to be potentially taxed twice on their earnings because they have chosen to save for a pension.

You may think “So what? It doesn’t affect me, why should I care about fat cats? That’s their problem, not mine.”  To that I’d say that we should all be worried about the precedent that’s been set here.  A door that has previously been kept tight shut has just been opened, just by the tiniest of cracks, yes, but it’s been opened.  Another door, the reduction in the level of dividend tax credits, thus effectively taxing pension funds, was opened just a tiny crack too by the last Conservative government.  That wasn’t too worrying at the time, but that door was kicked wide open in 1997 to such devastating effect on our pension schemes.

We should all be looking nervously at the tiny crack in this other door; if it’s ever kicked wide open we’ll all be sorry...

Steve Bee

24 April 2009

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Source: Budget 2009 - Building Britain's Future

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