The Government has already announced that the Winter Fuel Payment is to be axed for most people currently eligible. Only those receiving Pension Credit or other means-tested benefits will receive the payments in future. That means my household will lose £200 per year.
I can well afford that and I think it’s a pity that all such payments have not been scrapped. It’s an unnecessary complication of the tax and benefits system. Those who are so poor that they have been relying on this benefit should be compensated by a general uplift in other state pension benefits.
The next target for Government attack is tax reliefs on pension contributions. This currently costs the Government £48.7 billion per annum, not a small sum!
The main beneficiary of this tax relief are the high earners as it’s given at their marginal tax rate. The original justification for this tax relief was to encourage pension savings in private schemes so people were less reliant on the state in their old age. Pension scheme promoters no doubt thought this was worth promoting as it increased the funds under management. But does it really make sense?
And why should the wealthy gain so much when people paying little or no tax lose out? If you save in other ways, e.g. via bank deposits or ISAs, no such tax relief is available. So why on pension scheme contributions?
You may have guessed by now that I think this relief is too generous. If we want to encourage people to save then they should be urged to purchase stock market shares for the longer term. Pension scheme contributions are locked up and managed by well paid fund managers who actually take a hefty cut of any likely returns, and they have typically been investing funds in bonds of late giving lower returns.
I should declare an interest here. I retired from a full-time job almost 30 years ago and have not been contributing to pension schemes since then. I do have a self-select SIPP which is in drawdown and is managed by me. I preferred to have it under my control and make the investment decisions. As a result my pension has grown in size rather than been eroded by payments and charges. I have saved the high fees that would have been charged by a conventional pension fund manager.
The Government needs to encourage more people to take control of their own money and investment activity. Reducing tax relief on pension contributions so as to focus on the costs of managed pension schemes might just do that.
If you think my personal photograph on this blog makes me appear too young to have been retired for 30 years, you’re right. It’s based on an old photo suitably “improved”. I must get around to replacing it sometime.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
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