We now live in a world where the public sector is benefitting from pension legislation and the private sector is losing out. Something must be done to redress this imbalance.
Rumours are growing stronger by the day that chancellor Philip Hammond is about to tighten up on tax breaks for pensions in the imminent Budget. Hitting the tax brakes on private occupational pensions really will not help the situation.
This has been talked about for years, but now it seems inevitable. The government really needs to decide whether or not it wants to incentivise people to save for their old age and stop tinkering about with pensions for their own short-term gains. But alas, that is likely to remain an illusion.
Sense of déjà vu
This would not be the first time pensions have been raided by the taxman. Remember Gordon Brown abolishing tax credits in one of his many ‘stealth taxes’ in 1997? This is now reckoned to be costing occupational pensions £10 billion a year.
This amount would come in very handy right now to help plug the severe and growing deficits many defined benefit (DB) pension schemes are experiencing.
The so-called gold-plated DB pensions are rapidly becoming the sole preserve of public sector workers. They are disappearing completely from the private sector, which is having to pay more and more tax to fund public sector pensions (including MP’s pensions).
At the same time, the tax breaks helping the private sector pay for these expensive schemes are being removed, often by stealth.
It could be argued any cap on tax breaks that might be introduced by Hammond will hit the public sector as well. But this would be entirely disingenuous. Employee contributions form only a small part of the cost of those pensions, with the bulk being paid by the employer, i.e. the taxpayer.
As an example of the injustice, the ex-pensions minister Ros Altmann recently stated how the Bank of England received an employer contribution of 50% of payroll: unfathomable in the private sector.
Out of reach
Looking back through history, it is clear DB pensions have never really been affordable in the private sector. This can be traced back to the 1980s, when the pensions, either deferred or in payment, started to become protected against inflation.
Prior to that, the value was very often destroyed by inflation, therefore giving the illusion of being affordable. There was also a much shorter life expectancy. In other words, DB pensions have almost always been unaffordable when they delivered real customer value. Something positive needs to be done to help the situation, rather than the opposite.
Suggestions to cap tax relief at basic rate, or say 30%, do not seem to have been thought through properly either. Who would pay money into a pot and get 20% relief, only to be taxed at 40% when they take the money back out?
It can be argued that the government does not care about higher-rate taxpayers who can supposedly look after themselves. But with higher-rate tax starting at a £45,000 per year salary, an awful lot of people will be caught out.
Pensions savings are unfortunately held captive by the Chancellor, and subject to the whims and needs of short-term funding requirements. This is repeatedly demonstrated by successive governments of every political persuasion.
However, reducing the incentive to save for old age will hit the private sector particularly hard. Moreover, it will pay for the gold-plated pensions of those who administer us in the public sector.
Bill Vasilieff is chief executive of Novia.