Tax and Pensions
There was an Early Day motion laid in the House last week on the subject of enforced annuitisation at age 75. Those of you who have been following the BeeHive on Twitter (www.twitter.com/pensionsguru) will already have seen this last week, but I’ve decided to write about it here on the BeeHive itself today because the subject’s begun to bug me again since this EDM brought it all back to me. Here’s the text of the Early Day Motion (that you can also find in Hansard by following this link if you like - http://tinyurl.com/b9rp9b):
Early Day Motion
TAXATION OF ANNUITIES
That this House, particularly in view of the current deterioration of pension funds, is deeply concerned by the prospect that those who do not take a full annuity before the age of 75 years would pay tax at 82 per cent. of residual funds based on tax charges of an unauthorised payments charge of 40 per cent., an unauthorised payments surcharge of 15 per cent., a scheme sanction charge of 15 per cent., and a possible 40 per cent. inheritance tax charge on the remaining 30 per cent. of the fund, leaving a balance of just 18 per cent. of that part of the original fund; and calls on the Government immediately to consider legislation to alleviate this exorbitant tax situation.
My Twitter quip (because quips are all you can manage utilising Twitter’s 140 character limit) was that an 82% tax rate is a tad on the high side. That’s right, of course, but there’s more to it than that, and the more it’s been on my mind the more irritated I’ve become when thinking about it. I know there are bigger things in this world to get irritated by, by the way, but I think something has to be done about this.
In my mind it’s all to do with the fundamentals of what pensions are about. We are constantly being reminded that the special tax treatment for pensions is something that we should be grateful for. Well, yes I suppose that’s right, but apart from the provision of tax-free cash the only real advantage we have when saving in a pension is that we get to choose when we pay the tax on our income. If we defer income by saving it in a pension we don’t escape paying tax on that income; we simply defer the payment of tax until we eventually receive the deferred income as actual income later on in life.
The ‘special’ deal that we have when saving in a pension (as I said, apart from the tax-free treatment of cash sums at retirement) is that we only pay tax once on our earnings while we’re on the planet and in this place called the United Kingdom. We either pay tax on our income and spend it or save it in conventional savings schemes, or we can choose to defer some of our income by saving it in a pension scheme. If we do that then we do not pay tax on that deferred income until we start drawing it when we’re older.
There are two ways that any chancellor could arrange things for us so that we only pay tax once on our pension savings. One would be to ask us to take a leap of faith and pay into our pension savings from our taxed income, like we do if we’re saving in a building society savings account or something. If pensions were like that then we would be relying on a promise that future chancellors would not tax us on our pensions when we finally come to draw them decades hence. I don’t know about you, but my view would be that the risk of being taxed twice on your pension savings would be on the high side in that kind of arrangement.
The second and more reassuring way of convincing us that we will only be taxed once on our income if we save in a pension is, of course, to let us off paying tax on the way in. We can do that safe in the knowledge that, as sure as eggs are eggs, we’ll be taxed on the way out. And that, as everyone knows, is the way our pension system works today; we have the benefit of only being taxed once on our income if we save in a pension.
But by having this arbitrary age of 75 (slap in the middle of the period that many will call their ‘retirement’) where people reach a sort of ‘Hobson’s Choice’ moment with regard to their pension savings seems really unhelpful to me. Why should 76 year-olds have different rules applying to them than 74 year-olds? Or, to put it another way, why should some people be taxed twice on their pension savings?
If any of you want to add your two-pence worth on this or any other pension issue, by the way, you could always pop along to www.twitter.com/pensionsguru and leave your 140-character take on it there and we can all exchange our views on it with each other and make a hell of a lot of noise that may draw in other Tweeters; plenty of MPs are Tweeting these days; you never know, they might get caught up in it and be surprised by the strength of feeling on this and other pension issues. Every Tweet helps…
2 March 2009
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