15 Jul 2015, 11:00am
personal finance:
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  • UK government pensions consultation

    I shouldn’t think there’s anyone reading this who doesn’t read Monevator, but there’s apparently a consultation on about UK pensions. Props to The Accumulator for trying to sift the mutually contradictory desiderata in the comments thread into a narrative suitable for Her Majesty’s Government, who will probably file the results in the round filing cabinet on the floor.

    Nobody actually does a consultation to find anything out, they do it to put a veneer of faux democracy on the decision they are going to take anyway. Most of the motivated commenters are richer though not necessarily wealthier than I am 1, so the issue of the life time average and the annual contribution limits exercise many. I would have been sore about the annual limits as set now but I didn’t have £225,000 handy to put into a pension when I was going for it so I was okay. This isn’t my problem any more, because once I am 55 I won’t have space to avoid paying tax on pensions, so more pension saving isn’t useful to me. In the unlikely event that I decide to become a wage slave/productive member of society again I’ll just have to suck it up and pay tax, as my personal allowance will already be eaten up by existing income. Which is obviously a disincentive to putting my shoulder to the wheel of raising Britain’s dreadful productivity, though I will show later that it appears the Government has already decided I am over the hill in contributing to STEM activities, so it’ll be making knick-knacks on Etsy for me then. Bollocks to that, Iain Duncan-Smith. That’s the joy of financial independence – being able to issue that command.

    I paid less tax in my last three years by using pension saving than probably at any time throughout my working life even though I was in theory a 40% taxpayer. Yes it would be nice if I could save more than £3600 p.a. into a pension now and get back the tax, but so what.

    The straws in the wind are that the Government want to do for the 40% and up tax relief on pensions, perhaps making it about 33% for everyone, because the people they want to incentivise are basic rate taxpayers, higher rate taxpayers are rich enough to sort themselves out. It’s worth observing that a basic rate taxpayer can get 32% tax beneift if you can save into a pension by salary sacrifice, because the contribution comes off your pay before NI and tax are charged. But that’s for some future budget. Let’s just say that I am not yet putting my £3600 into a pension because if I can get 33% rather than 20% relief it will cost me £2400 rather than £2880. It’s not a huge amount of difference but it’s worth waiting till March 2016 for.

    The overall feeling seem to be that the well off and the rich have been making hay on the pensions front and this will get screwed down. In some ways pensions are an odd incentive – the government is encouraging people like me to leave the workforce early, some 8 years (relative to The Firm’s NRA) to 15 years (relative to my State Pension Age), while at the same time hollering that the country is short of scientists and engineers. I am tickled by the casual ageism of the Government’s report on High Level STEM Skills – supply and demand

    However, it is the inflow of new STEM graduates that is more likely to help ensure workers have knowledge of the latest science and technology – retaining older individuals does not do this.

    That’s the trouble with those old dogs – you just can’t teach ’em new tricks 😉 Bless. What they are saying is that we need young scientists and engineers – the Zuckerberg doctrine at work.

    away with ye - dead wood in the white heat of technology

    away with ye – weed out dead wood in the white heat of technology

    I have heard the theory that while the artistic side of CP Snow’s Two Cultures deepens and matures with age Zuckerberg may have a point in technology that young people are just smarter –  it seems echoed at GOV.UK 😉  I also observe that companies can’t be bothered to train young people in their specialisms these days – to wit:

    A representative of one of the major engineering companies noted, “For mechanical engineering, I would agree [there is no shortage]. However, for electrical / electronics, there are simply not enough graduates with the right degree and employers are trying to recruit from a small pool of those with the right degree content (i.e. higher-voltage direct current is a pre-requisite for the transmission and distribution industry: there the supply of graduates is inadequate)”.

    You, Mr Representative, are the problem, because of the fecklessness of your company. When I joined the BBC, with their specialism of colour TV, they damn well trained their graduate entry for a few weeks into the intricacies of the subject at their training facility in Wood Norton. You go to university to learn how to learn, and grasp the high-level aspects of your chosen field. Exactly what part of investing in people does this damn company not understand?

    The upshot seems to be that the Government wants to spend less on pensions tax relief, and in particular less on pensions tax relief for the well-heeled. This was also a theme of the Coalition government before this one. The Tories clearly have the interests of old money at heart with their fondness for inherited wealth and the iniquity that goes with that encouraged in the Summer Budget, but they are perhaps less fond of the nouveaux riche and their tax avoidance through the pension system. Hence the double targeting of the lifetime allowance, aiming to limit tax-advantaged pension income to about £40k (SWR of 4% on a lifetime allowance that seems to be trending towards £1,000,000, currently £1,250,000) and limiting the annual contribution rate to £40,000. The combination seems a bit rough – elementary arithmetic shows a young pup in the finance industry could just about make it, if he gets his running shoes on and saves the full £40k every year from graduating at 21 to becoming a greybeard at 52 (how many 52-year olds are there in finance?) but he better not want to buy a house, he needs to be prepared to eat ramen in those first few years and not inflate his lifestyle. In practice it’s not quite as bad as that, compound interest typically doubles the real value of savings over a 40-year working life, but it’s not going to be easy to reach the lifetime allowance with the annual allowance.

    I don’t understand the double whammy. There’s a case to be made for the lifetime allowance – there’s no need to tax-favour pension incomes of more than twice the median wage, but I don’t really see the point of the annual allowance limitation. And I certainly don’t agree with having both limits in place – one of the other seems okay. People’s careers vary much more than they used to, and the lifetime allowance sets a target of saying ‘this much income can be saved tax-advantaged, no more’. The annual allowance arbitrarily limits the capacity of the feckless Johnny-come-latelys to fix their pension savings in their forties and fifties – not everybody is a Steady Eddie on this.

    Notes:

    1. you are rich by the size of your wad and/or income. You are wealthy by how much of your income is committed/how many years your wad will maintain your lifestyle – open-ended for the financially independent. There is correlation but not necessarily causation between the two, because of the astronomical variation in lifestyle costs
     
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