Steve Bee: My plan for fairer taxation of pensions

Not a good idea.

One advantage of current system is that someone only £10k into HR tax rate can move that into a pension and take the income from it later and hopefully pay 20% (or no) tax. A smoothing out of income over your lifetime.

In this example, if you are going to get hit with 40% tax, you may as well take the hit now and at least have full control and access to the £6k thats left.

Your idea would further undermine the attraction of Pensions.

However, there will be another example where the City Exec is sheltering £250k from HR tax.... I think the Governments idea of limiting HR tax relief to (say) £50k of pensions contributions pa makes far more sense.

Please do not use computer power as an argument for creating unneccessary complexity....KEEP IT SIMPLE...please....

You remind me of a past Sales Director who always used to negotiate overly complicated "deals".... only to say...."you must be able to set this up on the computer, computers landed a man on the moon!"

The 'idea' must be a non starter. You assume that the tax rate for contributions is a flat 40% but this will not be correct. If tax rates change during the period of contribution what tax rate should be used when the pension is actually drawn? Who's to say that the portion of pension I get this year should suffer a 40% rate or any other rate.

For simplicity restrict the pension contribution to the basic tax rate on a maximum of, say, 15% of the salary. Those on high earnings can salt away extra 'after tax' income into other savings plans for their future benefit outside the pension plan!.

I totally agree in principle with Steve's suggestion and it would be great if future Governments would play ball. The big concern, however, is that you just don't know how future Governments will behave - their past performance is not encouraging - and big pension funds are a very soft target for a Government looking to raise more money from taxation.

What are Steve Bee's plan for a fairer pension system in general? Like one where you have full access to your money whenever you require it?

This type of tax regime is already, and has been for a long time, with regard to capital gains from regular investing in a unit trust outside of an ISA/PEN. Every contribution, net of fees, must be recorded and reported separately so that the tax can be calculated on it separately when the shares are sold. If only some of the shares are sold then the rule is lastin/firstout to select which shares are affected. Given that this has never been regarded as too complicated and that the pension companies already do the necessary bookkeeping (although they may not let clients see it) I do not see that Steve's almost identical proposal can really be criticised in this regard.

Anonymous 1: You have misunderstood - read the article again.

No, Steve, keep it simple, and keep it transparent and predictable. Limit pension contributions eligible for tax relief to 50k (or less), limit tax relief on pensions to the basic rate of tax, and make pensions taxable only at the standard basic rate of tax. That rate will vary according to economic condiitions and public policy, but at least there will be no extraordinary surprises.

What has floored me with the present government's interference to change indexation to CPI instead of RPI even on fully funded pensions is that all my assumptions about how I might provide for myself in retirement have been upset. I would never have made additional voluntary contributions had I anticipated that, and I am being advised now to take as much tax free cash as possible upon retirement, thus creating a new headache. I really didn't expect to have to spend my retirement actively managing (as opposed to regularly monitoring) investments.

A L Miller: I don't think I am wrong! I like to think all tax systems should be simple - perhaps it will happen (I'm looking forward to hearing what the new tax think tank will come up with) but probably not in my lifetime!

PAYE was simple tool to collect tax when it was introduced and it still works (if the coding is correct - just remember what a hash the computerised system made of the 2010/11 codings!). I remember when income tax was 19s 6p in the pound - no computers then but everything worked!

We now carp on about anything more than the 20% basic rate - in reality the basic tax rate is more like 31%, to includes the NI charge. A little less if you are in an approved pension scheme and contracted out. Who is keeping track of all these contribution rates - if it is down to computers storing the information - God help us all.

Chazza is right - constant fiddling with the tax system is making it more complicated and that leads to a greater incentive for tax avoidance (perfectly legal)

Steve you say that relief is given so that tax can be collected at the basic rate when the pension is paid, but there is a sting in the tails for the SIPP holders if they survive beyond 75 and do not take the annuity route, then there is added 16% onto the the basic 40% IHT. for the privilege of not enjoying money before retirement.

I think, but am not sure, that the higher rate is charged even if your basic estate doesn't exceed the £325k exemption. Blatant discrimination.

Let us not forget those that imposed it knew they were safe, the raid didn't affect them (their pensions) one iota. Pure hypocrisy and dishonesty, when they insist in every other area that there should be no discrimination (ignoring the continuing sexist discrimination of one section of the population who are allowed to take pensions earlier, even though they live longer)

This has a fatal flaw - all civil sevants, MP´s, most Quango´s etc make no personal pension contribution, so they would only pay 20% tax despite having some of the best pensions.

Suggest you drop this idea!!

What a daft idea.

How would you deal with, say, a self-employed person who may receive tax relief at differing rates on successive annual pension contributions?

In my opinion, there should be no tax relief on retirement contrbutions, and no tax on the proceeds at and after retirement. Tax relief on contributions is a distortion and lures us into investment vehicles that we would not normally consider.

Get rid of the current ptax regime and turn all our retirement investment vehicles into ISA-style pension contracts that are capable of accepting employer contributions.

David - no tax relief on contributions eh?

What about the employer contributions - would you have them grossed up and ask the employee to pay the tax out of his net salary? Surely you would have to do this to make it fair given the wildy different proportions of contributions paid by employers.

But then how do you determine the employer contributions on final salary schemes? Not easy as the costs are not known until the members die. If life expectancy rises after the employee has retired, his benefit goes up !!

And then what about those on final salary schemes who get a promotion? Their fund has to rise in a step to match. And the figures are truly mind boggling. A public employee on a half final salary who gets a 10k rise close to retirement needs his fund to rise around £150k. So at 40% he has to pay another £60k in tax out of his net salary. As for MPs who become ministers, the figures are much much more acute.

There are a number of points used here that may benefit from greater discussion.

1) Re Gatser - If you have ever seen the film Apollo 13 you may remember seeing the ground crew were using slide rules not computers - computers did exist, but the micro-chip had not been invented at that time. That will tell you just how good those people were; I am in total awe of what they did with the facilities available.

2) There is an assumption that higher rate tax payers retire on a basic tax rate. From experience a very large percentage of working higher rate tax payers retire as higher rate tax payers.

3) The Government talk about the level of tax relief granted. They NEVER talk about the level of tax taken from retirees. We have a cash flow process in play, which after all the time it has been in play should have stabilised, so changes are likely upset this stability - but Governments believe that they can get instability to work in their favour, and stuff the populace if it can be done long enough before an election to have been forgotten.

4) Why are we giving tax incentives to the rich? Tax breaks on items like VCTs make some sense in that they direct money in a desirable direction. But pensions are merely a “safe” savings mechanism. Are the rich so stupid that they wouldn’t save if they didn’t have these incentives - I don’t think so. So why the incentive?

5) Tax breaks create ancillary industries as advisers try to over use them, and Governments try to stop them with ever more complex legislation. The advisory industry creates little positive, except wealth for the advisers. I suppose that’s better than begging on the streets. It is, isn’t it?

6) The tax breaks also create a vast pool of money to be invested, which in itself creates yet another industry. And another industry of administrators who fight the ever increasing level of complexity in pensions legislation. I suppose that’s better than begging on the streets. It is, isn’t it?

7) The one sane comment that keeps coming through is to keep things simple. Do away with tax relief, and use the ISA technique, limiting what can be invested. Simples.

8) And I can find no fault in the logic of cdma5257.

Well, why should the taxpayer be the one always to suffer if the government changes the rules and levels of relief. How about this as an alternative idea? That, at the point of investment, the government commits to the minimum gilt yield they will pay out at that future time. Now, if the yield is too low to deliver a decent pension for most ordinary people (as it has now become, I think), then they won't bother to save and the government will have to increase the amount of state benefits to make up the difference. They won't want to do this so they will increase the gilt yield - not on all gilts but, let us say, on a restricted class of 'pension gilts'. This way you will know the sort of contract you are getting into rather than the open-ended situation of today. Comments?

More concerned on the comment in last sunday times whereby if one retires early on a DB scheme the calculated tax impact in that year is unbeliveable and unafordable

Our tax system is crackers for a consumer economy such as hours. Lets make tax simple, then pension planning can be simple also.

1 Tax free threshhold should be the same as the minimum wage.

2. After this there should be one flat rate tax for everyone.

3.consumer goods should be taxed on a necessity to luxury scale.Probably some form of vat.

Basically, let people who earn money decide how the want to spend it.

Come on Steve do you really think anyone believes that the current tax relief system is a lottery - it's wide open to abuse and it's the Basic rate taxpayers at the bottom of the ladder funding the Higher Rate relief for the already better off.

i heard of someone who put in a large contribution just prior to retirement and got higher rate tax relief which amounted to a huge sum for the ordinary man. Once the taxpayer had gifted him that he shortly thereafter took from the pension plan a tax free cash sum and deferred the payment of the pension for a year or so.

In the meantime his investments were switched into tax free national savings, Premium Bonds again tax free, maximum ISA contributions for self and wife and the balance into non income producing investments such as Zeros.

The plan was that having wrapped up his investments in a way which produced no taxable income he would then start to draw on his pension at a rate which would keep him within the Basic Rate band.

Tax avoidance isn't illegal but who is footing the bill for such tax avoidance ?One man's tax relief is another man's tax payment - it has to come from somewhere - you know that but like to avoid the issue.