One of the most forecast elements of the Autumn Statement was that there would be a change to pension allowances. And so there was. The lifetime allowance was cut to £1.25m (down from £1.8m only a few years ago) and the annual allowance was cut to £40,000 (down from its original £255,000 and current £50,000).
There hasn’t been that much general complaint about this. That’s probably for the simple reason that most people who can afford to put that much in their pensions in the first place know perfectly well that they shouldn’t be going on about it in this kind of environment. If you had a good enough final salary pension in the public sector that this hit you with a tax charge would you consider now a good time to mention it? Quite.
The fact is that over 99% of the population make pension contributions of well under £40,000 a year, if they make any at all.
There has been a little huffing and puffing about the annual allowance cut not being fair on entrepreneurs, who might make their money in lumps and so not get the chance to build up their pots as much as other people. But given the generosity of entrepreneurs’ relief (tax at 10% on your first £10m of entrepreneurial gains) most small businessmen have tended to keep their mouths shut on this one too.
It is also the case that cutting these allowances makes perfect fiscal sense. As Michael Johnson points out in the FT, pension relief is stunningly expensive to the taxpayer.
The relief on contributions in 2010/11 came to £26bn; that on employer National Insurance contributions came to £13bn; tax forgone on the 25% lump sum we all get to take on retirement came to £2.5bn; and that forgone on investment income came to £6.8bn. The total? £48.4bn.
That’s real money. So much so that it “equates to the combined budgets of the Home Office and Departments of Justice; Culture Media and Sport; Environment, Food and Rural Affairs; and Energy and Climate Change. Worse, almost 50% of this money goes to those making more than £50,000 a year – who are using it mostly as a method of tax planning or deferral.
Look at it like this, and you might start to think (as I do) that even at their reduced levels the allowances are still far too high. After all, the whole point of the pension relief is to encourage people to save so that they are not a burden to the state in their old age.
How much of a pension prevents you being a burden? The government has already told us the answer to that question. The minimum income requirement for flexible pension drawdown is £20,000 a year. So it makes sense to think that £20,000 is the number they have in mind.
So what kind of pot would generate income of £20,000 a year, which would then give us the ‘correct’ lifetime allowance? Capitalise £20,000 at 4% and you get around £500,000. If you must keep pensions at all (regular readers will know I would prefer to dump them entirely in favour of an expanded ISA system) there’s your lifetime limit. Any number above that is just odd.
If I were a politician determined to keep, but also to control, the pensions system (small mercies that I am not) I would cut the limit to that immediately; put a one-off tax on any assets above it and be done with it. I’m guessing the actual politicians have done the same numbers but plan to get to the end game a little more slowly – helped along the way by a little fiscal drag and a whole lot of inflation. We’ll see.
The real complaints about all this are coming from the likes of the Telegraph’s planned Hands Off Our Pensions campaign – which calls on politicians to stop making constant complex changes and stop treating pensions “like a piggy bank”.
But these complaints miss the vital points in the saga of subsidised pensions. The first is that fiscal default doesn’t have to actually mean not paying back actual debts. The term can also cover a government’s default on its implicit promises to its electorate. That’s what ‘austerity’ is all about.
The second is that in a time of crisis – barring total social and political breakdown - the government can indulge in financial repression, be that keeping interest rates always below inflation; forcing pension funds into sovereign bonds; or just taking back some of the subsidy they once put into your SIPP – and that there is nothing we can do about it. Why? Because they are in charge. That’s what sovereignty means.