Complicated feelings about pension tax breaks

The Telegraph is heavily hinting that Osborne will be axing higher-rate relief on pensions in his Autumn Statement. Leaving aside the observation that it's pretty frickin' late in autumn, indeed one might almost term it a Winter Statement if not for the associated negative press, what does this mean?

As a private sector higher rate taxpayer myself (boo hiss, oppressor of the poor etc.) I certainly appreciated the existing tax break: £1000 of gross income, with an employer-matched-up-to-5% deal, taxed at 40%, means I spend £600 of net income -- let's ignore the 1% employee NI for simplicity and the marginal effect on my employer of employer NI -- to achieve £2000 in my pension. This will be subject to tax when I finally take it, after a 25% tax-free lump sum, but at current annuity rates I'd be lucky to see a few hundred £/year in current money in my pension from this. Still, assuming retirement at 66 as the standard and if I plan to live past 80, that's not a bad deal.

If George gives me only 22% tax relief, I'm spending £780 (30% more) to achieve the same effect. That's less attractive. The killer issue is the return I expect from my pension investments and the price of annuities. If low interest rates are going to persist for the next 30-odd years (and, let's face it, they might) then my expected payoff will be lower anyway.

Suppose I say that my pension payments aren't worth the candle, and I'd rather spend now. Then George gets £400 of that £1000 in tax right now, and I get £600 in disposable income. That stimulates the economy and boosts tax receipts right now, at the expense of my pension's value at retirement. And since I'm a higher rate taxpayer, George can calculate that he won't have to cover any of my pension shortfall -- oh, wait, it's in 30 years, so who cares?

From where I'm sitting, this is a total no-brainer for the Government - money now, popularity now, and diffused downside in decades' time. After all, who cares if people don't have adequate personal pensions? Perhaps they can tax anyone on a public sector pension at 50% for any income over the median pension....

I can't blame George, a politician, for creating a politician's solution; to misquote the repulsive Freddie Lee Cobb from A Time To Kill:

You can't blame a politician for being a politician, no more than you can blame a dog for being a dog
but it behooves the rest of us to contemplate the effect on society in twenty to thirty years from reducing individuals' personal savings towards their retirement. It's not going to be pretty.

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