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Why unfair pensions tax relief is a fair target

(Update) If the chancellor has to make big cuts, removing the extra tax relief higher earners get on pension contributions is a good place to start. 


by Lorna Bourke on Nov 26, 2012 at 09:30

Why unfair pensions tax relief is a fair target

With £10 billion of cuts needed to balance the books, reducing tax relief on pension contributions looks a tempting target. This time it is probably not just scaremongering by the pensions industry trying to drum up business. The chancellor is believed to be taking it seriously with an announcement expected in his Autumn Statement on 5 December. 

Pension tax relief is an obvious candidate for raising more revenue because it costs vast sums in lost tax revenue which benefits mostly the better off. There is a powerful ‘fairness’ case for reducing tax relief on pensions. Half the population have no pension saving at all – largely because their after-tax income is so low they cannot afford to save. Yet these individuals pay more income tax than they otherwise would in order to subsidise the relief given to their wealthier colleagues.

Whenever the subject is broached the pensions industry – life companies, fund managers, actuaries, advisers and the rest –  predict doom, gloom, disaster and a mass exodus into offshore pensions if there are any further cuts in pension tax relief. 

But interestingly the government has support for a cut from a surprising quarter. Pensions expert Michael Johnson, a research fellow at the right wing think tank, the Centre for Policy Studies, has published a paper, 'Why Pensions Tax Relief Should be Reformed', arguing that tax relief on pensions is largely wasted and calling for a ‘radical overhaul of financial incentives.’ He claims that the £360 billion spent over the past 10 years on encouraging pensions savings through tax relief is ‘misguided and ineffectual.’

His figures show that in 2010-11 tax concessions on pensions were £26.1 billion for tax relief on contributions, £2.5 billion in lost revenue attributable to the 25% tax free lump sum, £13 billion in national insurance relief on employer contributions plus £6.8 billion in tax relief on investment income concessions – a total of £48.4 billion in just one year. These are huge sums – and most of the money benefits relatively wealthy people.

Cuts in higher rate relief

The case for reducing tax relief on pensions is very powerful. Before this year’s Budget, Danny Alexander, Liberal Democrat chief secretary to the Treasury, pointed out that the cost of the extra income tax relief for people paying tax at 40% or 50% is a hefty £7 billion a year. And pensions have been described by John Whiting, director of tax policy at the Chartered Institute of Taxation, as, ‘the last great tax shelter.’ As Dr Ros Altmann, pensions expert at Saga, the over 50s organisation puts it, ‘it is rather perverse to give the most tax incentive to people who need it least.’ 

Tax relief granted to people saving in registered pension schemes reached £32.9 billion in 2010-11, according to figures from HM Revenue & Customs, plus another £13 billion in relief for employers’ NI contributions.  This is slightly lower than Johnson’s figures but not far off.  At the top end of the scale those paying tax at 50% can claim tax relief on their pension contributions of up to £25,000 a year. Some £3 billion of relief on contributions will go to a maximum of 250,000 people earning more than £150,000 a year.

The argument for keeping higher rate tax relief on pension contributions is feeble, relying on the claim that although people get tax relief on contributions at their highest rate paid, this is clawed back because pension income is taxed once they retire. However, Johnson’s figures show that, ‘just one in seven who pay higher rate tax whilst working ever pay higher rate in retirement. From the Treasury’s perspective, this is a bad deal. Higher rate tax relief is a huge cost at £7 billion a year.’

Cuts to maximum annual relief

An alternative is to cut the maximum annual contribution which qualifies for tax relief.  Pension consultants warn that any further reduction in the annual allowance –  which was cut from £255,000 to £50,000 in 2010 and is now the odds-on favourite for change – would affect both the wealthy and those lower down the income scale in final salary schemes.

This is because although the annual allowance for pension contributions is fixed at a maximum of £50,000 a year – for those with Sipps and personal pensions as well as defined contribution occupational schemes – for those in final salary linked schemes the contribution is based on the increase in value of the pension benefits each year.

Pension consultants point out that if the annual allowance was reduced from £50,000 to  £30,000 per year – (and it is worth mentioning here that this is still more than the average person earns!) – it would affect those in final salary linked schemes, including civil servants, earning £30,000 to £40,000 a year – but only if they have already built up substantial benefits. 

The similar claim that older employees with Sipps and personal pensions and those in defined contribution occupational schemes who are ‘catching up’ on unpaid contributions from earlier years would also lose out is something of a red herring. There are very few ordinary employees who can afford to save more than £30,000 a year in a pension even if they are ‘catching up’.

Tax-free lump sum

The third option is to reduce the amount that can be taken tax free at retirement – currently 25% of the accumulated fund. There is little justification for this concession remaining but it would create uproar if individuals who had planned their retirement expecting to be able to take the tax free sums suddenly found that it was taxable. Removing the concession for future accrued contributions would initially raise little or no revenue, although long term it could cut pension costs significantly – saving around £2.5 billion a year according to Johnson’s calculations. 

Combine pension and ISA reliefs

Johnson calls for a radical reform of savings incentives including combining the annual contribution limits for ISA and tax-relieved  pension saving into a single limit of between £30,000 and £40,000 a year. This would represent only a relatively small saving for the Treasury of between £1.8 billion and £600 million. More important Johnson is in favour of removing higher rate tax relief on contributions which would save £7 billion – a useful sum to a chancellor looking for £10 billion of cuts. He would also like to see the full limit of £30,000 a year available for ISA savings (which also accumulate tax free but have the advantage of much greater flexibility plus tax free income on drawing the pension.)   

Finally, as many have pointed out, the notion that the removal of higher rate tax relief on pension contributions or a reduction in the annual allowance from its current level of £50,000 a year would discourage wealthier individuals from saving is nonsense. The majority of middle income and higher earners are responsible individuals who would save for their retirement regardless of tax relief – and millions of them already do so. Let’s hope the chancellor listens to Johnson rather than cutting benefits to the poorest.

Further Reading:

Want to know more about how pensions work? Read The Lolly guide to pensions.

65 comments so far. Why not have your say?

Anonymous 1 needed this 'off the record'

Nov 23, 2012 at 17:22

As a higher rate tax payer in my late 30's who invested decent amounts into my pension a few years ago who subsequently lost his job, could not access this pot despite having little or no savings and then watched his pot tumble drastically in value this would be the final straw.

It would be ISAs all the way for me with nothing other than my employers contributions going into my pension.

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william Westlake

Nov 23, 2012 at 17:42

I have to disagree with most of this article. It is perfectly true that those people who are in the lower income half of the population cannot afford to save for a pension, but there are an infinite number of other things that lower earners cannot afford either, which is no justification for increasing the tax burden on those who can afford to save up to support themselves in retirement.

Perhaps other, better informed readers could balance the argument by telling us how much of the total proportion of income tax received is paid by higher rate tax payers, and how much extra tax these same people are paying as a result of loss of their personal allowance and loss of child benefit, not to mention the hike in highest rate tax from 40 to 45%, via 50%. Armed with these facts I would be in a better position to decide whether Lorna is speaking the whole, the plain and nothing but the truth when she asserts that the poorer members of society “ subsidise the relief given to their wealthier colleagues “.

Lorna may not like it, but without a significant tax advantage there is no point in paying into a scheme that forces a person to lock up their money for up to 60 years (assuming a 20 year old lives to 85 years), pay tax on the income then received and then at death pass the remaining pot onto other more fortunate longer lived pensioners, rather than their family.

Certainly for a higher rate tax payer I see no point in pouring money into a complex and extremely rigid scheme where my savings are taxed at 20% on the way in and 25% on the way out.

Lorna seems to be arguing that the more wealthy don’t need a pension because they should have enough money to look after themselves.

This approach would certainly give us the pleasure of putting a number of IFAs, tax advisors, accountants, fund managers and advertising execs out of business, but would also encourage the feckless to end up relying on the state having spent the money that would have been given to the Pru on cocaine and hookers.

However, since for the past 15 years official government policy has been “spend the lot and let’s pray our kids will sort out the mess for us”, I see it as entirely possible that Lorna’s suggestions will, lamentably, be adopted as government policy.

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Steve via mobile

Nov 23, 2012 at 17:48

Reducing the £50,000 allowance to say £40k or £30k is the only option, alongside stopping the carry back rule on being able to back date payments a couple of years. Any other is simply unworkable.

Saving in a pension there has to be an incentive, and its unfair to keep tinkering with it as we need to plan for the future. It's the older generation that got us in the mess and its again the current generation that has to pay all the debt off.

Equally, higher tax payers are being hit left right and centre, I feel they are paying more than fair share. 40% - 45% of income, + ni, plus loss of child benefit, plus loss of personal allowance etc etc is not an incentive to do well in life. Leave them alone, time to pick on other areas like benefit scroungers, corporations sending uk profits overseas, and the countless people fiddling tax in dodgey schemes.

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Charles Passmore

Nov 23, 2012 at 18:00

Removing this makes personal pensions even more of a waste of money.

I would never recommend to anyone not on higher rate of tax to consider a personal pension. Bettter of with an ISA, where the money is completely under your control.

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Nov 23, 2012 at 18:14

Personally I agree 100% with Lorna on this one. Cutting the relief to the standard rate would be both "Fair" and politically astute - something this government hasn't managed to get right so far!!

Of course, on the subject of pensions, they should also reverse the GAD cut which is savaging the Income Drawdown pensions of so many self-reliant individuals who have saved for their retirement.

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Keith Cobby

Nov 23, 2012 at 18:23

I agree entirely with William and Steve. These measures, particularly reducing tax relief to the basic rate, will be the end for personal pensions.

I would prefer to see the ISA enhanced with perhaps some matched funding or tax relief.

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Nov 23, 2012 at 20:58

people have not got enough money to save into pensions,or, realise what a waste of time and money they are.Think more and more people will take over the running of their own finances, as they don't know how the rules will be when it comes time to take out their own pension.Then watch future goverments go after sipps and isa's as revenue ......

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Dennis .

Nov 23, 2012 at 21:34

This whole argument and discussion is based on an assumption that tax rates will stay as they are. When I started work in the 70's the basic rate was 35%! Who knows what rate you will be paying in 40 years time? All I know is that with constant government tinkering you will be worse off regardless of the current rates. Basically you need all the help you can get.

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Nov 24, 2012 at 11:57

I am afraid Ms Bourke is one of those people who do not understand the whole pensions regime and cause a lot of damage in the process.

The real error here is the use of the word tax "relief". When pensions are taxed the whole lot of what you get back is taxed as income, even the return of your own money, so in effect the government gets back the so called"relief" it has given you. Even government has admitted in the past, a white paper round about 2002 or 2003, that tax "relief" is nothing more than a tax deferral. Ms Bourke should examine the reason why pension annuities are exempted from the way normal whole of life annuities are taxed, ie on an income only basis.

Not only that, pension fund dividend income is now ultimately taxed as "earned" income at 20% WITHOUT a dividend tax credit (thanks, GB)rather than at the non pension rate of 10% with a 10% credit, ie nil. Neither does the pension fund gain from the annual capital gains exemption that none pension fund gains are entitled to.

Then there is the 55% drawdown tax when you die etc etc. Private sector money purchase pensions cost about £7bn per year in deferral which the government just about makes up for with the withdrawal of the divi tax credit. I was a 40% beneficiary of tax "relief" and having analsysed what I am now paying in tax on my drawdown, the government will end up getting back rather more than the tax deferral it gave me. Most of the cost of the tax deferral is for public sector final salary contributions, and as such should be accounted for as part of the public sector pension cost rather than as a specific tax benefit. The government knows this which is why it will not do any of your suggestions as it may put the spotlight on what really happens to private sector pensions. It may have to abolish the 55% death tax, restore the dividend tax credit, start treating pension annuities as ordinary ones etc etc and it will not want to do that. I have not mentioned a whole host of other benefits the government gets from private pensions, such as corporation tax on the profits of the annuity companies.

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Michael Stevens

Nov 24, 2012 at 16:12


Maxium Tax Relief 40%

Annual Allowance £50,000

No carry back, if you do not use it, you loose it.

25% Maxium Tax free Cash.

PEOPLE can understand these simple rules.

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Roy England

Nov 25, 2012 at 20:28

Sorry but pension saving as proposed here is for mugs. Such schemes are a conspiracy cooked up by Governments and the insurers whereby your pots of money are sitting targets for some future Gordon Brown to come along and pick your pockets. Save for your old age by all means but not in locked-in opaque schemes such as these for the only winners are the Government and the insurers who are skimming and scamming below the water line.

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normski 2nd

Nov 26, 2012 at 10:59

Well said Roy


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Nov 26, 2012 at 11:55

Doesn't this article ignore the revenue created by the taxed pension income, and also the benefit that spending the PCLS has on the economy? I think its reasonable to bring down the annual cap, but the tinkering each year/every change of government is were the real damage is being done. You should be able to set up your scheme make a decision if its right for you with your advisers and then proceed. How else can you 'plan'??

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Nov 26, 2012 at 12:15

@ Anonymous 1:

Why did you "watched his pot tumble drastically in value" ? Strikes me as a bit foolish to sit there and do nothing.

It also reads as if you over committed yourself to one main savings vehicle - one that is illiquid until age 55. Again, sounds a bit foolish to me.

Where was your planning? Where was your diversification (across tax-wrappers as much as asset classes)? Where was your emergency cash reserve?

I suspect that you got greedy and pumped almost every spare pound into your pension tempted by lure of the tax relief on contributions. This is perfectly understandable and not uncommon. Doesn't make it right you have found to your expense.

Time for a re-think and a review with a decent IFA.

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Anonymous 2 needed this 'off the record'

Nov 26, 2012 at 13:07

Here we go again, instead of hitting people's savings why not;

Cut £10 billion off our EU contributions, or

Save Billions by bring our troops home NOW!, or

Cutting £10 Billion from the Quango budget;

No lets do the easy thing and clobbers people's pensions

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Rose G

Nov 26, 2012 at 13:54

The entire UK pensions scam is now out in the open!

I would not touch any government scheme or proposal with a barge pole because you know that in the long term, they can do just about anything they propose to any area of our lives, we just put up with it, occasionally give them a drugging in the national elections, until the new lot enter westminster, and the circus continues.

The only people benefitting from these constant review, and changes to our pensions is those who make the regulations and those who manage the funds, for the rest of us, it is a nightmare trying to plan your future, because one way or another, the money you saved in a pension scheme will not be worth what you imagined you would get when you first signed up for it.

It is daft to go through the salary sacrifice route, only for future governments to change the goal posts every time a new set of time wasters take over at Downing Street - saving in a pension fund is a mugs game and I certainly have advised my children not to sign up for these products which seems like a good idea at the time, but in net terms is not worthy of consideration because of governments ability to renege on deals made to workers - note though, that those whose income is 6 figures & over, like George Entwhistle, they can demand and get whatever they want, otherwise, they have knowledge of where the dead bodies are, and off course, in his case, it is licence fee payers who can fund his golden hand shake!

Anyone who still trust politicians should take a look at how they are still pocketing tax payers money, for their own use, because they can!

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Nov 26, 2012 at 17:00

No it is not an unfair tax relief!

I will restrict my reply just to Lourna's statement that over half the population have no pension savings and her assertion that this is because their after tax income is so low that they cannot afford to save. A much more likely reason is that they have worked out that there is no point in saving for a pension as the the less they save the more the state gives them in benefits. Much better to spend your money on beer, tobacco, holidays and Sky TV subscriptions and let the benefit system look after you in retirement.

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peter hart

Nov 26, 2012 at 17:01

Pensions operated by insurance companies et al are all smoke and mirrors. I speak from experience. ISAs are a much better bet.

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Nov 26, 2012 at 17:02

The Lolly: Why unfair pensions are a fair target

There fixed that for you. Go after our MPs & public 'servants'

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peter hart

Nov 26, 2012 at 17:10

Challenge spending your money on tobacco but otherwise sounds good.

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Lyndon Edwards

Nov 26, 2012 at 17:21

1. Pensions are deferred income, so are only taxed when they come into payment.Hence tax relief on the contribution, or the income would be taxed twice. Seems fair.

2. If this government is so desperate for money they should reclaim the funds left from contracted out funds (APPs for the professionals) after all beneficiaries (widow/ers)have died. These funds were built up with bonuses paid to individuals by the government to contract-out of the additional state pensions (SERPS) to reduce government liability for a higher pension, and the residues are left with the insurance companies. Some contracts which started in the late 1980's are now very valuable. (All pension funds have to buy gilts to provide the income when the pension is vested, but the gilts don't cease without value just because a pensioner dies). It's a nice little earner for insurance companies who provide the annuities, and the APPs are subsidised by all taxpayers.

How about it George Osborne; have you got the cojones?

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Nov 26, 2012 at 17:28

In my view it is a nonsense to say that only relatively few higher rate taxpayers willl continue to be so after they retire. If you can afford to set aside £50,000 a year ( and the much higher figure previously) your pension is almost certain to attract higher tax rate. If we are all living longer it is the Government's interest to have as many pensioners as possible payingo the higher rate of Income Tax plus fact that there expenditure is likely to generate higher levels of VAT income. Suggested stance is short sifghted.

As an aside on several occasions I have had impression does not believe in Capitalism. Why did she choose her present career?

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Roy England

Nov 26, 2012 at 17:53

Jaymak: What you say is all very logical but Governments are not that. For example, take those who elected for flexible income drawdown only to find that THIS government has now restricted the amounts that can be drawn to annuity type levels.Daft or what given that the economy needs a boost from spending and there would be, as you point out, an increase in tax take from both income tax and VAT. Who really believes that GO has a brain in his head and the best thinkers are in the Treasury? Dopes all. Just maybe the Autumn Statement will correct this stupidity.

To pick up on Al's point. Dead right. Please cancel the pensions of all MPs and all those in the Treasury and BOE and sign them up for NEST pensions. Why don't these people look in the mirror and stop their own gravy trains?Just then they might have the moral high ground to deal with others.

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Nov 26, 2012 at 18:03

It's hugely unfair to refer to high-rate tax relief as the last great tax shelter completely ignoring those on overly-generous (unsustainably so) guaranteed public sector pensions.

If you work for the public sector you avoid the same taxation that would be applied to high rate tax payers who have no choice but to pay considerably more into their scheme to reach the same outcome.

Contributions made by public sector workers into their scheme are no-where near covering the cost requiring to run them, and who bails them? High-rate tax payers !

Due to the threat of strikes government's are only prepared to tinker at the margins, far easier to go after those nasty high-rate tax payers ! Has 'high-rate tax payer' become a pejorative term? To read most articles in the press you might think it had!

Before anyone starts lecturing about fairness, private sectors workers should be allowed high rate tax relief to acrue a pension pot as big as the average public sector worker. Once that threshold is reached by all means withdraw high-rate tax relief.

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Nov 26, 2012 at 19:02

Truly disgusting article. So the middle classes who abide by the law, pay their own way and seek to do the right thing by trying to provide for their own age are to be punished, punished, punished and punished again.

How can anyone possibly justify taxing income and then taxing it again if the recipient saves some income in order to provide an income in later life. This amounts to enforced slavery until death to feed the death spiral of disincentivising work and saving in favour of idleness and state dependency.

If more tax revenue is needed simply raise the tax rates. Of course this would require honesty, transparency and integrity. Expecting any of these from self serving politicians is an oxymoron.

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Nov 26, 2012 at 19:44

Trust Badger - I totally agree with you.

But anyone who is employed by a company can avoid this silly and unfair proposal. Just take a salary sacrifice so your employer pays the pension and not only will HMRC not see any tax on it, but also they will lose out on NI. The employee could negotiate with the employer to get the saving in NI paid as additional contribution.

This illustrates how unfair any restriction on personal contribution is and how little those who advocate such restrictions understand about pensions and tax.

We need to change the tax law so that taxpayer pension contributions to MPs and public employees are treated as BIK.

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Nov 26, 2012 at 20:00

@Jon - thanks I'm aware of that work around and am fortunate to have an amenable employer but how long before the likes of Lorna are shouting tax avoidance from a pedastal? I absolutely agree, the tax law needs to be changed to recognise the huge untaxed perks that are public sector, civil servant and MP pensions schemes funded in large part by private sector tax payer's high rate tax.

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Nov 26, 2012 at 21:06

Rather than target higher-rate taxpayers - yet again! - I agree with many of the comments here that it's about time the government started dealing with the huge cost of public sector pensions (including MP's gold-plated pensions that can be earned even for a very short political career) and I speak as an ex-public servant myself - for half of my working life.

Public sector pensions already accrued should be protected to some extent but there's no excuse for not confronting the cost of future public service pensions.

I don't disagree with reducing the annual limit of tax-relieved pension contributions to £40,000, or even £30,000, but I would be extremely annoyed if all my careful planning for retirement in just a few years time was thrown into disarray by any changes to the 25% tax-free lump sum that can currently be taken when starting to draw a pension - that's earmarked to pay off my mortgage!

I would also point out that higher rate taxpayers aren't being "given" anything by the government as tax-relief, it just means that they don't pay as much tax as they otherwise would but they still pay far more tax than the "low-earners" for whom it's pointless to save for a pension given that they would just lose out on means-tested benefits during retirement and, of course, they also wouldn't then be able to afford holidays abroad, 30 fags a day, beer and the full Sky sports and movies package...

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clive chafer

Nov 26, 2012 at 21:10

I cannot see the sense in giving higher rate taxpayers pension relief at 40% when people paid less can only reclaim their 20%. Surely giving higher rate taxpayers relief on their pensions at the rate of 20% (like everybody else) is still pretty good value so this seems an obvious way of raising money to assist our parlous debt position.

The key thing is not to waste these potential gains by increasing government spending in other area and to close all the dodgy tax loopholes as evidenced by this evening's Panorama programme. That is where it all goes wrong.

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Nov 26, 2012 at 21:17

@clive people who are paid less are only taxed at 20% on their pension contributions; while high rate tax payers who are taxed at 40% get 40% relief on their contributions - seems logical enough. if high rate tax payers were given 20% relief, they would be taxed up to 60% (20% on their contribution and a further 40% where taking an income) not good value at all - all the meantime public sector works, civil servants and MPs are laughing their way to the bank having not been taxed on their super generous pensions funded by high rate tax payers - tell me, how fair is that?

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Nov 26, 2012 at 21:18

@clive by way of clarification, i meant to say people who are not high-rate tax payers don't pay high rate tax, therefore they don't get to claim high rate tax relief.

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clive chafer

Nov 26, 2012 at 23:32

Surely that depends on how you look at it, trusty Badger.

Yes, you are taxed at 40% of earnings if a higher rate tax payer but with pension relief at 20% you would get half back. Still not bad. You only lose half of what would have been lost in tax, had you not contributed to a personal pension.

On retirement, you still get what everyone else does on income from the pension i.e. over £8000 at the nil rate band, then a big chunk at 20% and any large amount at 40%. That's fairly affordable, isn't it?

Perhaps I have missed something.

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Nov 26, 2012 at 23:48

@clive, you're forgetting the other half of it, you loose 20% since you've paid 40% tax on your contributions, then when you come to retire you stand to loose another 40% when you start drawing and income from the pension. You might say you'll no longer be a high-rate tax payer as a pension, I wouldn't be so sure, the value of money is decreasing i.e. your pound buys you less and the threshold at which high rate tax is applied has also decreased so theres a very real possibility that due to fiscal drag and inflation that by the time we retire we may find continue to find ourselves paying high rate tax on pension savings we've already been tax 20% on. And that's why high rate tax relief exists.

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Nov 26, 2012 at 23:50

(sorry for the typos - I really wish citywire had an edit button)

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Nov 27, 2012 at 00:58

Clive - you are missing a BIG point. Someone who works for an SME may get NO employer's contribution. For a decent pension he needs to put a good 25% into his fund.Do not forget that for an index linked pension of just £10k pa you need a pot of around £350k or more. (350k will buy a 3% increment, but the way things are going we could hit 30% inflation as we did when Thatcher had to inflate our way our of a much smaller debt she inherited)

Someone who is in public employment puts in 6-8%, but the taxpayer contributes the rest which is TAX FREE as far as the employee is concerned.

Given that public service pensions are worth at least 3 times what was expected a few year ago, and that private pensions are taxed by :

1. Browns ongoing withdrawal of tax credits (retrospective as it applied to existing funds)

2. The cost of the bank bailout. The shareholders not only took the brunt of the losses, but the taxpayer made a huge profit from the revenues from the spending which was never repaid. A net transfer of wealth from the funds to the taxpayer.

3, Artificially low interest rates which cut pension fund returns and annuities - another form of tax to help the Treasury fund the deficit and thus help the taxpayer

And now you are advocating additional tax on personal pensions.

Do you know what the word FAIR means. Do you have a DB pension ?

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Dennis .

Nov 27, 2012 at 09:07

I have a private sector DB pension and I can remember putting extra AVC payments into it in the 80's when the higher rate tax was at 60%! At that time it was hardly worth asking for a pay rise so this was the preferred option. I am now getting my money back as a pension and paying 20%. Is that unreasonable?

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Nov 27, 2012 at 09:37

If higher rate tax relief is removed completely I reckon it would have a drastic effect on the UK pensions and investment industry. Once you have built up a certain pot size the rest is all a question of whether you pay your tax now or when in retirement.

As always this would be a meaure to squeeze the middle earners who don't have the income to pay fancy tax accountants to avoid tax altogether.

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Nov 27, 2012 at 10:56

@Dennis: Of course not, you did the right thing, however if you where to advocate levying more tax on DC schemes when you're a recipient of a DB scheme then *that* would be unreasonable.

The thing a lot of folk fail to appreciate is that as a member of a DC scheme you can pay into the scheme 3 times the amount you might pay into a DB scheme and not be assured of as good an income.

Most DB and DC schemes were predicated on 8-12% annual return on investment when they were created and continuation of that growth rate seems very unlikely for a long time (at best 5%). The same folks who go on and on about casino banking sometimes forget that all pensions rely on stock market investment / speculation and the returns it generates.

However if there is a shortfall the employer or tax payer bails out the DB recipient's scheme provider whereas the DC recipient is completely screwed. Consequently, members of DC's schemes need to contribute vastly more and these big sums attract tax scrutinity in a way that DB's recipient contribitions don't (since a) contributions are nowhere near the amount required to fully fund the DB scheme b) the tax payer is making up the huge difference and DB recipient benefitting from this amount tax free.

It's unfair then that DB schemes such as that provided to the public sector, civil servants and MP are taxed as a benefit in kind; or conversely that DC contributions are taxed at a level that offers greater parity with the benefit DB recipients are extracting.

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Nov 27, 2012 at 11:02

> public sector, civil servants and MP are taxed as a benefit in kind

are not ^ taxed

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clive chafer

Nov 27, 2012 at 11:07

I take your points Trusty badger and Jon.

The reduction in annuity values is all part of the crazy housing bubble that had been allowed to inflate up to the credit crunch, based on too low interest rates and the inability to learn lessons from the 1980s bubble, as well as the banks' own idiocy in bankrupting themselves. Now we are stuck with artificially low interest rates and massive government debt.

These are highly undesirable but I was looking at fairness of pension tax relief in terms of basic rate versus higher rate tax payers, rather than the wider issues around annuity rates.

I do have a DB pension Jon which won't come anywhere remotely near higher rate income tax when paid and realise that I am fortunate in this respect. However, I do think that was part of the deal when I entered state employment many years ago as one's earnings have been relatively modest. There have been times in the past when personal pensions were thought to be a better investment but that idea has gone out of the window now. No doubt more changes will arise in the future.

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Dr Jimbo

Nov 29, 2012 at 12:05

Successive Governments have now created a real crisis for almost anyone expecting to retire and live off savings or investments. Only the very wealthy and those lucky enough to be on inflation proofed final salary and inflation protected schemes can hope to achieve a financially stress-free retirement.

Many comments above echo this sentiment. Although arguments for and against changes in taxation releifs can be made, at the end of the day the purpose of pension or retirement savings is being undermined by constant changes to the assumptions and rules under which the money is deposited or withdrawn. Long term stability has vanished.

The recent GAD controls illustrate this dramatically - but these small contributory texts cannot show what happens to a drawdown SIPP over time so I have put together a single page website to show how a £100,000 SIPP performs at three different GAD rates - 2%, 4% and 6% and also what happens to those lucky enough to build up a pot of £1.5million - 40% tax relief may help to build this quickly but I would suggest the last thing anyone would do in this case would be to leave it in drawdown - or even in the pension pot!

The page is at

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Nov 29, 2012 at 13:03

@Jimbo - I understand conventional wisdom is to buy/swap into long maturity gilts for the purposes of draw down. Hypothetically speaking, if yields were to remain low, is there anything that would prevent you from allocating a substantial percentage of your SIPP to a high income fund yielding 5-6% therefore reducing the need to eat into the capital as you might if gilt yields were very low?

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Nov 29, 2012 at 13:31

It's the fundamental issue being obscured by concentrating on the level of tax reliefs. Basically doesn't it come down to the simple fact that for every 100K you get a annuity of n K. All you need to do is decide on what is considered a fair pension to live on and how much of it the Government subsides. So if we say 20K is enough and all of it is covered and each 100K buys you 4K then the pot is limited to 500K.

You then let people put in whenever and whatever. If they want more they save in other ways out of taxed income. Now you may have spotted this is in fact the system we have, in which case the total pot should be just reduced not the annual allowance and this limit is simply set to be total annual salary (with some carry forward). Unfortunately this doesn't meet the agenda which is to bash the so call well off to make everyone else feel better and have all the tax from the post retirement income today. Still applying logic has never been a strong point of any Government

At 1.5 million it covers a pension of about 60K, in which case may limiting it to 30K to fall within the lower tax would seem reasonable eg max pot of 600K and then you're on you own.

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Dr Jimbo

Nov 29, 2012 at 14:49

@TrustyBadger - The drawdown tables show that if you are able to invest the pension pot at 4% whilst GAD drawdown rates are limited to the 2% tables (reaching a fixed £140 per thousand drawdown at age 85) you can keep an income of £5300 which gradually increases to £6135 at age 80 and then falls away to £5000 again by the age of 86. But by then the pot has depleted to just over £32k so you need to have it reinvest at 18% just to maintain your income at £5k until you are 95.

The total value of the drawdown between 65 and 85 is just over £122k. Someone with an inflation-proof pension at 65 of £5300 would see his pension rise to almost £8700 by age 85 - and over £11,000 by the time he was 95; and all with no investment decision stress!

This illustrates the huge gap between SIPPs and public sector inflation proofed pensions.

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Nov 29, 2012 at 15:10

@Jimbo - thanks for the explanation and how very foolish of me to think that having saved for so long I'd be able to enjoy a stress free retirement!

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Nov 29, 2012 at 15:48

Dr J - your

is an excellent piece of work; but for me just demonstrates why it is so necessary for people to learn how to manage their money, especially if they wish to place their pension funds into a SIPP.

Too many think along the lines of TrustyBadger above: "...allocating a substantial percentage of your SIPP to a high income fund yielding 5-6% therefore reducing the need to eat into the capital as you might if gilt yields were very low?"

There is nothing to stop that fund losing capital at a greater rate than the promised 5-6% yield return.

If you operate a SIPP you owe it to yourself to get smarter than that.

I'm not going to provide investment courses on CW, other than to say:

# Read The IC

# Read Moneyweek

# Read FREE CAPITAL by Guy Thomas

Finally, just to be specially kind to readers, if you want 8%pa secure for the near 5yrs to Sept'17 - buy RECP, an 8% pref offered at 100p and which redeems at 100p at that date. Do yourself a favour, go and research it then pop a few as a core holding in yr SIPP....

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Nov 29, 2012 at 16:32

@SKYSHIP - If you can't be helpful at least try to be polite instead of making patronizing remarks when someone asks a question!

I'm aware a fund can loose capital regardless of the promised yield - the captial value of the underlying investment is volatile. For arguments sake, if the fund invests in 1000 shares of National Grid, the value of those shares changes constantly. The point I was trying to make was if you do not need more income than dividends payed by the fund (less it's charges) then you are not eating into the fund (i.e. selling off units/shares), so all things being equal you expect to continue to recieve that dividend and not see it decrease, and hopefully that dividend increases in line with inflation. There is no certainty of course.

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Nov 29, 2012 at 16:49

Sorry - I thought I was being helpful.

I can help with your spelling too if you like...

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Nov 29, 2012 at 16:49

@SKYSHIP - Additionally I realise there are a myriad ways a fund can loose capital through bad investments - however I'm not here debate the risks of high income funds vs gilts - investing gilts carry it's own risks. I'm not advocating anyone parks large somes in an investment without doing their own research and monitoring their performance. My question was whether high income funds made more sense in a low gilt yield environment.

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Nov 29, 2012 at 16:52

@SKYSHIP - Do you have anything useful to add to this discussion or are you merely content to act like a child?

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Nov 29, 2012 at 17:23

Apologies - quite out of character!

Yes, I agree with your underlying thesis, a high income fund would certainly have been advantageous in 2011/12. The question now is whether a bubble has developed in the underlying holdings as the World & his wife have occupied that space.

Personally I see capital and income as two sides of the same coin; so I'll pursue both in the most secure way possible. For me that means through asset-backed investments.

# the RECp I mentioned provides a secure 8%pa

# I then go elsewhere for what looks to be a secure 12%pa from a liquidating hedge fund. Adding a 4% yield to an 8% Gross Redemption Yield provides 12%pa from ACD. Acencia Debt Strategies is a highly specialist investment on track to repay 20% of its NAV through a tender next June; then the balance of 80% in Mar'15. Not the sort of thing you'll find mentioned elsewhere; but the joy of CW is that sometimes you find the occasional pearl...(sp 83.5p; NAV 101p and rising)

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Nov 29, 2012 at 18:06

@SKYSHIP - No harm done. Fortunately for once I was in high income before it became 'flavour of the month' so I've done quite well out of it. With growth prospects generally looking grim I'm content to keep my core holding until the catalysts for change manifest themselves more fully; the rhetoric from the central banks is clear "do whatever it takes" but I'm not sure what it will take for them to cross that rubicon - unsurprisingly none of them wants to remembered as being responsible for Weimar 2.0. On the fiscal side, policians are intransigent.

I can't comment on your recommendation as liquidating hedge funds are not a speciality of mine, but interesting nevertheless :o) Fortunately the current climate favours macro over stock selection so that gives me half a chance at improving my lot through sector / fund selection - I'll be the first to admit I'm not great at picking individual shares. I dabble a bit as I find it helps me focus a keener eye on my SIPP.

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Calm down and think it through

Dec 02, 2012 at 10:23

The extreme generosity towards high income earners in the form of higher rate relief, the maximum annual relief and the tax-free lump sum has been understood by many for a long time. The belief that this generosity will be eliminated has been widespread for a long time. The only real surprise is that it has lasted so long.

I know it might not suit our personal interests but sometimes we have to accept that a fairer world might involve the loss of an unfair benefit.

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william saunders

Dec 02, 2012 at 11:31

I agree that if there are further reductions of tax relief on pension contributions it makes more sense to save in an ISA.If this happens on a large scale, however, it will not be long before ISAs lose tax advantages

Dividend income in an ISA is already taxed at 20%,courtesy of Gordon Brown and not reversed by George Osbourne.The main remaining advantages are exemption from capital gains tax and no tax on on income withdrawn.These could the next targets.

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Dec 02, 2012 at 14:27

Hi - you guys are certainly going hammer and tongs - Dr.Jimbo has - for me - hihglighted the most relevant 'unfairness' of pensions - the ridiculous GAD tables. We should petition to get these revised. It is ridiculous that a SIPP holder can take so little out of his pension - Dr.J mentioned a pref share - how about AVIVA 8.75 currently yielding about 7.5%. Your capital may reduce in value - but you have a very safe income stream - well in excess of the GAD rates. And this is a company many would buy their annuity from..!

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Dec 02, 2012 at 16:28


Two things to say in response:


There is an e-petition on the HM Government website to repeal the change in the maximum allowable income for Drawdown Pensions. The Coalition Govt last year reduced the GAD rate from 120% to 100% - viewed by many as a totally iniquitous move; and certainly one that heavily penalises pensioners

Not many signatures thus far, but this is a highly specialist subject and you have until April 2013 to add your name. Hopefully the Government may have acted before then...if not this week!


There are 4 Aviva prefs - AV.A, AV.B, GACA & GACB. All yield c7.4% but all undated so vulnerable in the event of sharply higher interest rates.

Better to go off piste and buy the very best non-bank pref - Real Estate Credit Investments 8% redeemable cum pref (RECP) . Redemption at par on 15/09/17 - that redemption date protects from a fall following an interest rate hike. The sharper eyed will see from that redemption date that they can no longer be bought in an ISA as they are under the 5yr threshold. Still, in a SIPP - marvellous. Sp 99.5p-100.5p. No stamp duty and pay 2% gross qtly. 8% yield.

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Dec 02, 2012 at 17:52

What an amazing response to this article. It shows how strongly people feel about pensions. I have a more radical proposal.

1 Reduce the maximum contribution on which you can have higher rate relief to £30000 per year. Anyone who can afford sums like this can make further provision on their own via ISA s etc. However to make it fair for all it must apply to all civil servants as well and Mr Cameron MUST take action to remove his own obscene pension along with that of the Speaker and the Lord Chief Justice.

2. Reintroduce the dividend relief stolen by Gordon Brown as this would be very beneficial to the lower paid.

3. Revise the entire public service pension sector so that all pensions are based on the same formula. ie. based on average salary at say age 66. No exceptions - this should apply to everyone from cleaners to teachers to Judges and Prime Ministers.

4. As stated above the special pensions of the Prime minister etc. are obscene and must be removed immediately.

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landlord 88

Dec 02, 2012 at 19:51

What a load of humbug.

This is not only the proverbial tinkering, this is pandering to the jealousy of the lazy unsuccessful to deny the hardworking and deserving successful (hows that for a political slogan ?)

The 1st principle should be : You cant take out more than you put in. Period.

The 2nd principle : Be in charge of your own destiny - and your own money.

The 3rd principle : Encourage those who are unsuccessful to want to be successful.

The 4th principle : Stop trying to save the world. Stop trying to make the world equal. Stop trying to make the sexes equal. Stop trying to pull down those who work hard to succeed. Stop killing the incentive to succeed. Stop the stupid do-gooders.

The 5th principle : Give generously and heartily to help those less fortunate than yourself - but only do so voluntarily.

The 6th principle : Make the prison a prison instead of a foc holiday home away from home.

The 7th principle : Stop the freebies. Nothing good ever comes from freebies. They are too expensive for both givers and receivers alike. Start with the NHS.

The 8th principle : De-register any political party(ies) that cannot stick to a balance budget while in government or try to fudge the economic cycle like Brown did.

The 9th principle : Get public sector back to 19% of GDP as it was at the turn of last century instead of the 53% it is today - Am I sick and tired of paying tax and watching them play monopoly with my money. I am also sick and tired of the legalised mafia trying to bully more and more money out of me.

The 10th principle : Get rid of all the immigrants who cant and wont speak English, who cant contribute positively to the British society, who wont assimilate into the British society, who wont respect the British way of life, who wont pledge allegiance to this country, who hate this country......

The 11th principle : Get rid of H & S and Human Rights. Get rid of all those stupid laws that only create work for the public sector at the expense of the private sector. Stop shooting ourselves in the foot.

The 12th principle : Lets try to fashion a meritocracy society instead of a parasitic one.

Rant over.

From somebody who came to UK 41 years ago penniless and made good and who love this country and the British people the way it was.

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Anonymous 3 needed this 'off the record'

Dec 02, 2012 at 20:07

Governments should be encouraging people to invest in Pension schemes when they are able to not discouraging them. After all the government has made a complete hash of looking after retirees so far. I am now able to look after myself in retirement thanks to a tax relief assisted pension plan. I would never have invested in this in earlier years because I only did it for the tax relief at the time. Now it is paying off, which was exactly the government's objective.


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Dec 03, 2012 at 07:48

Landlord88 - problem is that the poor, the incapable, the feckless, the dependent, the crooked, the downright lazy - together account for more than 50% of society; and we live in a democracy, which is a system that takes from the successful and gives to the unsuccessful regardless of merit.

Eventually we will need to ditch democracy and adopt Nevil Shute's meritocracy.

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landlord 88

Dec 03, 2012 at 08:43


Cant agree more.

Just like the public sector portion of GDP, the 50% (or Mitt Romney's 47%) has grown from perhaps a 10% base 50 years ago through state pampering. We very probably still have a 10% base that are really in need of help. The rest have grown into the life support system courtesy of of our government and misguided do-gooders perpetuating a lose-lose situation. End result : Lowest Common Denominator rules.

The solution is not by pulling down the successful and taking away incentive to do well. but to educate and encourage those who are unsuccessful to become successful. Self sufficiency and meritocracy is the only way forward.

Take a look at Singapore and how it has progressed in 1 generation.

Democracy as we know it is doomed anyway. Our politicians need the vision and courage to go forward.

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Dec 03, 2012 at 15:37

Dr Jimbo - very helpful spreadsheet thanks !

Skyship - thanks for link to e-petition, didn't know about it but have signed it now and hope that everyone on this thread affected by changes to GAD rules will do likewise !

To repeat the link,

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Dec 03, 2012 at 16:15

National Private debt £1.41 Trillion

National public debt £1.1 Trillion

Unfunded state workers pension liability £1.05 Trillion

PFI Liabilities over next 30 years £301 Billion

Current UK tax take £600 Billion p.a

With these figures the tax take has to increase somehow but penalising private sector alone and leaving the public sector to call its own tune is just wrong

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Dec 05, 2012 at 14:15

WE'VE won:

From Osborne's Autumn Statement:

"I have also listened to concerns from pensioners about draw down limits. I am today announcing that the Government will raise the capped drawdown limit from 100% to 120%, giving pensioners with these arrangements the option of increasing their incomes."

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Dec 05, 2012 at 14:31

Great news ! Thanks !!

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