As the FT reports this morning:
The Tories introduced the lifetime pension cap. Based on the value of a fund, and not just contributions, it has caused major difficulties for hospital consultants in particular. There was an obvious problem needing a solution.
The Tory solution was to abandon the cap.
That solved nothing but perpetuated a massive bias towards wealth in the pension system.
Now, Labour says it will maintain that bias.
It could have instead said it would abandon the cap and cut the rate of relief on contributions. That would have worked. But no, there is nothing like that. There's just another £800 million bung to the wealthy.
Ending the two-child benefit cap to take 1 million children out of poverty would cost £2,000 million (£2 billion). Apparently, that's not possible. If you can work out the logic of that and come to any answer that includes the terms 'economic sense' and 'empathy', I will be amazed.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Gordon Brown announced a reform of the pensions tax regime in 2004. When those changes came into force in 2006 they included a £1.5 lifetime allowance (and position of then-existing pension funds above there limit was protected, albeit they could not be paid into any more). Annual contributions had a high cap, but the total aggregate fund over a lifetime was capped. The idea was that the maximum annuity that could be purchased would be something like median earnings.
That seems fair to me, as long as the funds are used to maintain a person in retirement and not (as seems to be there case recently) used to dodge inheritance tax. Pension funds have an unwarranted IHT exemption.
The lifetime allowances reached £1.8 million in 2010. With inflation that would be about £2.7 million now, but the Conservatives created the problem with doctors pensions by cutting the lifetime allowance in stages to about £1m before abolishing it to solve the problem they had created. Labour should bring the lifetime allowance back, but not at £1m. And also abolish the inheritance tax exemption.
I was thinking about pensions tax relief and got to wondering if the real solution is to change the internal taxation of pensions themselves.
If pensions had their own equivalent of an annual personal allowance and were taxed on the excess there would be less tax relief for very large pots because they should have much higher levels of income and capital gains.
It feels a bit like tinkering around the edges, but maybe it would work?
It’s a curious idea worth thinking about…..
“If pensions had their own equivalent of an annual personal allowance and were taxed on the excess ….”
Sorry for my ignorance (having left UK long before I retired), isn’t this how pensions are already taxed in UK?
I think the suggestion is for taxing within the fund – which are tax free at present
I think the Lifetime Allowance on pensions was highly problematic, and it makes sense for it not to be revived. It had different implications for different sorts of pensions: the problem for the consultants with a final salary pension was that doing Covid overtime if they were near the end of their career had perverse effects on valuation, whereas people with investment pots had unpredictably volatile valuations whose utility as providers of pension income depended on the vagaries of annuity pricing.
Limiting tax relief on contributions would be a much fairer way of avoiding too much favouring of the rich. I would restrict tax relief to basic rate income tax, limited to the band for which basic rate applies.
And there is obviously something wrong in inheritance tax not being applied to DC pension pots, though I can see why there might be a reason to want to replicate the “widow’s pension” provision (widowers can benefit too) of DB schemes.
I would much rather restrict contributions and reliefs than have a contribution cap
Hi,
I have really enjoyed your writing so far, Richard.
I was wondering if you could answer my question.
In the TV debates, we keep hearing that the tax burden as the highest for 70 years. However, corporation and the basic rate of income tax are the lowest they have been in 50 years.
How do we have the highest tax burden if income tax has fallen so heavily?
Together those two taxes ate less than 40% of all taxes
The story is much bigger in other words
Just in case you missed it,
I saw some months ago on their website, Reform had some plans to announce this.
The Guardian reported that Reform are saying they would not pay interest on QE to commercial banks and use the opportunity to raise income tax thresholds to £20,000.
It is, IMO, a version of tax cuts grow the economy. They may do to an extent but I think investment would give a better outcome.
I plan a comment in the morning
Some FT fella was on C4 news stating (pretty unequivocally) that if the BoE withdrew their 5.25% interest rates on the commercial banks QE and it sounded as if he also meant the reserve deposits lodged with the BoE they would lose control over interest rates.
He suggested they could reduce the % rate paid to the banks, but not cut it completely, as that would adversely affect bank profits !!!!!
Obvs the reserve interest rates were only paid from the GFC, so it looks like he conflated the reserves required under the new rules post GFC with QE, the interview wasn’t quite clear on that.
I’d be very interested if tomorrow’s comment on this topic could cover this apparently misleading interview, as I may well have missed a crucial qualifier.
Let me try….