Yesterday I did the first stint of some temporary part-time teaching of economics at a local School of Management. One of the perks of the job is a free copy of the Financial Times, which I accepted in order to pass the time on the bus-ride home, as I'd had to leave in the morning before my Guardian had been delivered.
The FT front page headline concerned a "tax blow" to "pension pots." Apparently the amount on which you can claim tax relief on contritions to your pension is to be reduced from £225 000 (per year!) to £50 000. and once your pension pot has reached £1.5 million you can't have any further tax relief at all. The majority of page three (I wonder why newspapers choose page three for the topic thought to be of major interest to readers) was devoted to illustrations of how this blow would "impact on high earners," along with a section on "how to avoid being caught out."
All the illustrations assumed a pension of 1/60th of salary for each year worked. My own teacher's (public service) pension is based on 1/80th of salary for each year worked.So much for the alleged gold plating.
When I finally got round to reading it I found that the Guardian devoted only one inside column (on page 34) to this devastating news. It included a comment from Brendon Barber, general secretary of the TUC, that even further reform is needed since, because of different rates of tax paid, "it costs a higher rate taxpayer just 60p to put £1 into their pension because they get 40p tax relief. But a standard rate tax payer ... gets only 20p relief, so it cost them 80p to save £1." Oddly, the Financial Times doesn't seem to have mentioned that.
In a "Viewpoint" article the Guardian's financial diarist pointed out that tax relief on pensions "costs" the Treasury £19 billion a year, and that 25% of it goes to the top 1.5% of earners. The FT doesn't seem to have mentioned that either.
This modest reform is to be welcomed and the coalition government is to be congratulated on not being quite so relaxed as Labour about people not only becoming becoming filthy rich,but also staying that way.
The intriguing thing to me is to wonder what exactly people do with these enormous pensions. The real purpose of a pension is to avoid destitution once one's working and earning life is over. Though far from gold plated, my own teacher's pension gives me a very comfortable lifestyle, and I can't really think what I'd do with more. Perhaps the real purpose of these enormous pension pots is to feather the nests of children and grandchildren, hardly conducive to promoting fairness, or even equality of opportunity, and therefore not a proper object for any tax relief at all.
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A friend and former colleague (ie also a teacher) has contacted me by Email as follows.
ReplyDelete"I have only quickly read your piece and should point out that that, although our Teachers Pension is only calculated on 1/80ths instead of 1/60s we also get a lump sum equal to one and a half times our last year’s salary whereas those who get 1/60s do not get any lump sum. A lump sum is preferable because you can either purchase an annuity to boost your pension if you wish or you can invest it in other ways. Once in a pension or annuity it dies with you whereas a lump sum can be passed on to your family or next-of-kin. So Teachers are not so bad off with 1/80s in my opinion."
I entirely agree that the lump sum (which I received and appreciated) makes the teachers' pensions look rather better. However, the advantage on being able to pass it on to family or next of kin (or children and grandchildren)goes rather beyond the scope of a pension in my view, assuming that a surviving partner is cvered by the pension, which is, I understand, an option.