Tax increase: shot in the foot
Tax increases on the pensions of the rich will backfire
Tax increases on the pensions of the rich will backfire
When Alistair Darling announced in the Budget that he would be depriving
those earning £150,000 or more of certain tax advantages associated with pension
contributions he said, by way of justification: ‘It is only right that those who
caused the downturn should bear more of the costs.’
On one level, this was simply playing to the gallery, since even Darling has
to know that not every high earner in Britain is a banker. On another level, it
exposed the fact that the move was pure political expediency and an attempt to
milk the public furore over the outlandish pension accorded to former Royal
Bank of Scotland chief Sir Fred Goodwin. What many missed is that a pension
on this scale requires a pot far above the 2009/10 £1.75m lifetime limit and is,
therefore, wildly tax inefficient. As such, it would generate tremendous revenue
for the chancellor in punitive taxes. In a rational world, the chancellor would
want every top executive to seek such a pension, since the additional taxes
raised would ease the national debt.
It is almost impossible to find a pensions expert who has anything positive
to say about Darling’s wheeze – other than the odd, honest admission that it
plays wonderfully for the advisory community.
There is no doubt that it puts those who can most afford pensions advice
deeply in need of that advice. In an economic downturn, Darling has tossed them
a particularly tasty bone and given them a wonderful reason to tighten their
links with the country’s richest people.
Gary Heynes, tax partner at Baker Tilly, points out that even higher earners
need to be providing for their future and the proposed changes are ‘a huge
disincentive’. He says the legislation introduces ‘huge complexity’ into the tax
legislation.
KPMG pensions partner Lee Jagger says the government could find unintended
consequences coming into play. At present, a range of normal corporate
activities, including promoting executives and allowing early retirement, could
trigger liabilities under the proposals.
One of the most critical points about the changes introduced by the Budget
was made by Stephen Haddrill, director general of the Association of British
Insurers, after the Budget. He warned that the chancellor ‘had sent an alarming
message that [the government’s] pension promises can be easily broken.’
Anthony Harrington is a freelance writer