Scrapping higher-rate tax relief on pensions is easy to propose when you are in a DB scheme, says Teresa Hunter
Does anyone know if pensions minister Steve Webb was speaking in his ministerial capacity when he advocated scrapping higher rates of tax relief or as a LibDem candidate ahead of the general election?
To be fair, a belief in the same tax relief for all has been a conviction held by Webb for some time. But you can’t escape the fact that it will undoubtedly play sweetly to his grass roots.
I googled “Who are the LibDems?” and nothing sensible came up, but if I had to describe them, I would say teachers, academics, secretariat types, boffins and university lecturers like Webb himself.
Tax relief is an irrelevance for most of these people as they are cushioned by some form of salary-linked pension. Not for them the agonies of reading annual pensions statements and wondering how they will ever save enough for a decent retirement.
I have been talking to young people nearing their 30th birthday to get a picture of how much they have in their pensions and how much they need to save if they want to retire during their sixties. The group comprised lawyers, accountants and engineers.
If they need an income of around £40,000 in retirement, they will have to save £2.1 million. Let’s hope the life-time cap keeps up. So how much have they saved so far? It ranges from £8,000 to £40,000.
They can get there, by the skin of their teeth, if they invest £300 monthly, their employer matches it and the tax man throws in 40 per cent.
But for young people who, in most cases, have yet to buy a home, start a family or pay off student loans, saving even £300 monthly is a huge ask. If tax relief on pensions is cut, moving abroad for a higher salary may prove even more alluring.
Of course, to academics such as Webb and some of his fellow LibDems, making all things equal, such as tax relief, has an irresistible logic. After all, of the £24 billion received by individuals, 70 per cent goes to higher-rate payers.
People gasp at that number but I cannot fathom why. It stands to reason that, if tax relief applies, those who pay the most tax will get the most relief.
The TUC, along with Age UK and a couple of other bodies, commissioned the Pensions Policy Institute to crunch the numbers around the whole issue of pensions tax relief. The PPI reported back that limiting it to 20 per cent for everyone would save £13bn, setting a new relief rate at 30 per cent would be cost neutral and increasing all relief to 40 per cent would cost £15bn. The Government would need to add nearly 4p to the basic rate of tax to pay for that, so it’s one option we can forget.
But things aren’t equal in life, are they? That is never truer than when it comes to pensions. For a level playing field, all defined benefit schemes must be scrapped, including those in the public sector. Only then will pensions be truly equalised.
Yet the TUC would be the first to squeal loudly at any such suggestion. Universities pay 16 per cent into their members’ pensions, three times the typical employer contribution in the private sector. The mind boggles as to how they can afford this.
Furthermore, does it make sense to boost the tax relief of some in work before knowing how they will respond to the new pensions freedoms. I don’t want to sound like a Victorian reactionary – don’t give them baths, they’ll just keep coal in them – but where is the sense of giving some people taxpayer subsidies if they take them straight out to spend?
In truth, we don’t know how people will respond and, until we do, further tinkering is best left alone.
I have never voted LibDem at a general election. But having moved house recently, I discovered my new local MP is a very senior LibDem, one I have always admired and one of a few individuals I believe is an asset to the House of Commons.
I have already decided to vote for him. We need more like him and I suspect he may need all the support he can get at the next general election.
But this business of the pensions tax relief has given me cause to pause. I have children, you see, and they don’t work for a university or elsewhere in the public sector.