Thursday, 11 July 2013
Ordinary taxpayers fund lavish pensions for the super-rich.
On Saturday I shall be attending a meeting of the Social Liberal Forum in Manchester and, as a blogger, have been given the opportunity to take part in a lunchtime question and answer session with Steve Webb, Minister of State for Pensions in the coalition.
My question, if I get the chance to ask it, will concern the way that the rich are enabled to build up huge pension pots with tax-free contributions. I have chuntered about this in previous posts but, to prepare myself, have now looked into the details. These are even more astonishing than I'd suspected.
At present anyone with the means is allowed to contribute to a pension pot up to the amount of his or her annual salary. So, for example, if you earn £35 000 a year, then you can put £35 000, tax free, towards your pension. (How you find that extra £35 000 isn't explained: presumably from the bank of mum and dad, from accumulated wealth or an inheritance.) The present maximum permitted contribution is £50 000 a year.
However, you don't have to find the whole £50 000. If, for example, your earnings put you in the highest tax bracket, currently 45%, then you just put £27 500 into the pension, and the Treasury contributes the other £22 500 (the tax that would have been paid on on income of £50 000). If the mathematics of that confuses you, then consider an income tax payer at the standard rate of 20% who puts in £8 000: then the Treasury puts in, yes, £2 000 (the tax that would have been paid at 20% on £10 000.) The current maximum permitted size of the pot is £1.5million, almost half of which, for a taxpayer on the top rate for the whole period of contributions, would have been contributed by the Treasury: that is, you and me.
According to financial advisers Hargreaves Lansdown, the Treasury paid out a total of £35bn on this scheme in 2010/11.When the pension pot is paid out, any capital gains are tax-free, as is any part of the pot taken as a lump sum.
To discover actual figures which this largesse of public expenditure would generate I have pretended that I have contributed to the maximum of £1.5 million, that I am 65 and about to retire at the end of this year, answered a few questions about my health and habits (now non-smoker, normal blood pressure, no major health problems ) and received the cheering news from http://www.agepartnership.co.uk/vites/rf/ann_ae_enhanced_2/ that my pot will produce a tax-free lump sum of £375 000, plus an annual pension of £58 488.75. (This would be in addition to my Old Age Pension, currently about £110 a week, or
£5 700 or so a year, which is all a lot of pensioners have to live on in our "all in this together" society.).
It is perfectly legitimate and sensible to encourage saving for retirement by offering a tax incentive, but surely there should be a limit. My own suggestion is that the limit should be up to that which is estimated to be necessary to produce a retirement income equivalent to the median wage. Those who wish for a more generous provision for themselves in old age should be perfectly free to do so, but at their own expense and not the expense of the taxpayer.
My question to Steve Webb will be: What limit does he propose, and what measures is the coalition taking to approach that limit?
He may well reply that already, as from 2014/15, the maximum annual contribution is to be reduced to
£40 000 and the lifetime allowance to £1.25m. Well, that's a move in the right direction but that £1.25m would still generate for a healthy 65 year old a tax-free lump sum of £312 5000 and an annual pension of £56 193.00. The median wage is about £21 000, so there's still a long way to go.