Moore McDowell critical of flat-rate pension tax relief suggestions

[DerKaiser]

Do you think that perhaps some of the resistance to this idea might be pensions industry concern about losing all that lovely commission?

The pension industry naturally has an agenda, and that is maximising pensions coverage to maximise profits.

Is this agenda good for society?

I would argue yes. It encourages middle income individuals to provide for their own retirement rather than become a burden for their children or the state.

There is very little for low income individuals in private pensions, but we're not going to solve that by varying current rules. Whatever way you look at it, if they can't afford to save fr the future no amount of encouragement can change that.

If you look at high income individuals there is a limit to the benefit they can get. Once their fund hits a certain level, any extra contributions will ultimately be taxed at the higher rate. (Any perceived unwarranted benefit from tax free lump sums could be addressed by limiting their value, separately from the tax relief on contributions).

The real target is, and always has been, middle income earners. If you can encourage these people to put away disposable income for the future you will have ultimately succeeded in restricting the number of retired individuals dependent on state welfare and eligible for medical benefits, etc

See below for the Society of Actuaries press release:

[broken link removed]

 

[Complainer]

The pension industry naturally has an agenda, and that is maximising pensions coverage to maximise profits.

Is this agenda good for society?

I would argue yes. It encourages middle income individuals to provide for their own retirement rather than become a burden for their children or the state.

There is very little for low income individuals in private pensions, but we're not going to solve that by varying current rules. Whatever way you look at it, if they can't afford to save fr the future no amount of encouragement can change that.

If you look at high income individuals there is a limit to the benefit they can get. Once their fund hits a certain level, any extra contributions will ultimately be taxed at the higher rate. (Any perceived unwarranted benefit from tax free lump sums could be addressed by limiting their value, separately from the tax relief on contributions).

The real target is, and always has been, middle income earners. If you can encourage these people to put away disposable income for the future you will have ultimately succeeded in restricting the number of retired individuals dependent on state welfare and eligible for medical benefits, etc

I wouldn't argue with too much of this 'benefits' stuff, but the cost has to be considered. You could make a similar good case for most aspects of Govt expenditure, but something has to go.

In terms of overall priorities, there is lots of room for reducing the cap for high earners substantially, and reducing the tax relief to standard rate (as has been done for most other tax reliefs).

Perhaps the pensions industry could cut their generous commission rates then to show their commitment to pensions coverage?

 

[DerKaiser]

In terms of overall priorities, there is lots of room for reducing the cap for high earners substantially, and reducing the tax relief to standard rate (as has been done for most other tax reliefs).

The cap could be reduced for high earners, but the real long term saving would be in restricting the tax free lump sum.

If the tax relief on contributions is set to the standard rate then we are effectively limiting the income people should provide for themselves in retirement to the tax free level i.e. about €5k p.a. income on top of the OAP for an individual. I think this is a backward step in terms of aiming for those who can afford to put away money now avoiding being a burden in retirement.

 

[Complainer]

The cap could be reduced for high earners, but the real long term saving would be in restricting the tax free lump sum.

I

Good point re the lump sum.

If the tax relief on contributions is set to the standard rate then we are effectively limiting the income people should provide for themselves in retirement to the tax free level i.e. about €5k p.a. income on top of the OAP for an individual. I think this is a backward step in terms of aiming for those who can afford to put away money now avoiding being a burden in retirement.

The only limit is to the state subsidy - People are still able to save for their retirement.

 

[LDFerguson]

The only limit is to the state subsidy - People are still able to save for their retirement.

In this instance, the only people who would benefit from tax relief on pensions would be those whose income will be so low as to be tax-exempt in retirement. Nobody else would bother putting money into pensions if the tax relief rate was standardised. As you say, we could all then simply save money into deposit accounts towards our retirement instead.

So are you suggesting that the whole private pension system, i.e. public sector and private sector pension schemes, be abolished, except for those who will be tax-exempt in retirement?

 

[Complainer]

So are you suggesting that the whole private pension system, i.e. public sector and private sector pension schemes, be abolished, except for those who will be tax-exempt in retirement?

Please don't put words into my mouth. The only thing that I'm suggesting is abolished is the unfair subsidy to higher-rate taxpayers.

If the 'whole private pension system' has no value to add to retirement savings without tax relief, perhaps we are better off without it anyway. Is it your view that this entire industry has no value to offer consumers, other than tax relief?

 

[LDFerguson]

If tax relief on pensions is standardised, then Employer Contributions for higher-rate taxpayers would then also need to deemed taxable as they're effectively attracting higher-rate tax relief also. Are you in favour of an additional tax on Employer contributions to all pension schemes, private & public sector, for higher-rate taxpayers?

As a high-rate taxpayer, if I'm faced with a choice of (a) investing in a pension product which only attracts tax relief at the low rate, and on which my benefits in retirement are going to be taxed or (b) investing in the same fund outside of a pension product, subject only to exit tax on gains, I'd seriously consider (b).

If the Government make it unattractive for all but a small group of people to contribute to pensions, there will only be a need for a pensions industry to service that small group.

 

[Complainer]

If tax relief on pensions is standardised, then Employer Contributions for higher-rate taxpayers would then also need to deemed taxable as they're effectively attracting higher-rate tax relief also. Are you in favour of an additional tax on Employer contributions to all pension schemes, private & public sector, for higher-rate taxpayers?

I confess that I hadn't thought too much about employer contributions, but I don't see why the same principle should apply. Perhaps you could explain why you think the state should provide a higher subsidy to medium/high earners over low earners.

As a high-rate taxpayer, if I'm faced with a choice of (a) investing in a pension product which only attracts tax relief at the low rate, and on which my benefits in retirement are going to be taxed or (b) investing in the same fund outside of a pension product, subject only to exit tax on gains, I'd seriously consider (b).

If the Government make it unattractive for all but a small group of people to contribute to pensions, there will only be a need for a pensions industry to service that small group.

If people choose product b over product a, they are still going to be (most likely) dealing with the same intermediary and the same investment company. The only thing that changes is the name of the product and the tax relief available.

 

[LDFerguson]

I confess that I hadn't thought too much about employer contributions, but I don't see why the same principle should apply.

But that's a hugely important aspect of any proposals to standardise or reduce tax-relief on personal contributions. If the same principle doesn't apply to employer contributions, the plan is unworkable. Any high-rate taxpayer simply arranges with their employer to make the scheme non-contributory (i.e. entirely funded by employer contributions) and continues to enjoy effective high-rate tax relief. No saving to the Exchequer.

Perhaps you could explain why you think the state should provide a higher subsidy to medium/high earners over low earners.

I think that it is important that there should be an incentive for all earners (low, medium or high) to save towards their retirement. We all know that the State Pension will be under pressure in a few short years due to changing demographics of the country. If the rate is standardised, it reduces the incentive for higher-rate taxpayers.

Incidentally, I have no problem with there being ceilings on tax relief on pension contributions, pension funds and/or tax-free lump sums.

If people choose product b over product a, they are still going to be (most likely) dealing with the same intermediary and the same investment company. The only thing that changes is the name of the product and the tax relief available.

That may or may not be the case for the intermediary firm, if the firm has the resources and expertise to switch to savings & investment products once their pension clients decide to stop their pension contributions. But what about all the back-office staff whose entire career has been built on pensions administration? Many of the larger schemes are administered a handful of corporate pension brokers, e.g. Mercer, Hewitt etc. If everyone switches from pensions to savings products, the job losses will be huge.

 

[Complainer]

But that's a hugely important aspect of any proposals to standardise or reduce tax-relief on personal contributions. If the same principle doesn't apply to employer contributions, the plan is unworkable. Any high-rate taxpayer simply arranges with their employer to make the scheme non-contributory (i.e. entirely funded by employer contributions) and continues to enjoy effective high-rate tax relief. No saving to the Exchequer.

Sorry - typo there. I meant to say "I confess that I hadn't thought too much about employer contributions, but I don't see why the same principle shouldn't apply"

I think that it is important that there should be an incentive for all earners (low, medium or high) to save towards their retirement. We all know that the State Pension will be under pressure in a few short years due to changing demographics of the country. If the rate is standardised, it reduces the incentive for higher-rate taxpayers.

An incentive to save is certainly desireable in principle, but where does it come in the overall priority. No point in incentivising saving for tomorrow at the expense of basic services today.

It is important that such an incentive is equal for all workers - I still haven't seen any good reason why medium-high earners should get higher incentives?

That may or may not be the case for the intermediary firm, if the firm has the resources and expertise to switch to savings & investment products once their pension clients decide to stop their pension contributions. But what about all the back-office staff whose entire career has been built on pensions administration? Many of the larger schemes are administered a handful of corporate pension brokers, e.g. Mercer, Hewitt etc. If everyone switches from pensions to savings products, the job losses will be huge.

I've no wish to push anyone out of a job (though there is a special place in customer service hell reserved for Mercer I reckon). However, if these people are adding no value (other than tax relief), why should pensioners be paying for these services? If huge volumes move from pensions to standard investments, isn't it likely that many of the jobs will move as well?

 

[LDFerguson]

I've no wish to push anyone out of a job (though there is a special place in customer service hell reserved for Mercer I reckon). However, if these people are adding no value (other than tax relief), why should pensioners be paying for these services? If huge volumes move from pensions to standard investments, isn't it likely that many of the jobs will move as well?

I don't agree that the current pensions industry workforce are creating no value. The current regime of tax relief creates a demand for pensions administrators and staff. Lots of people are employed to meet that demand.

If the demand is eliminated by an adverse change in tax relief, I agree that there would presumably be a demand for extra staff to adminsister all the extra savings & investments products. But I suspect that it wouldn't be the same people. So you'd have an lot of people losing their jobs because their skills are specifically pensions-related and the new jobs are created in the savings & investments industry. Fine from a big picture view, but not if you're one of the people who loses their pension administration job.

Sorry - typo there. I meant to say "I confess that I hadn't thought too much about employer contributions, but I don't see why the same principle shouldn't apply"

There would be serious implications. If an employer is currently making contributions to a pension plan for a high-rate taxpayer, presumably there would then need to be some form of BIK assessment on the difference between the standard rated tax relief and the high rate. Without wanting to get into any public vs private sector debates, there would be some huge practical issues in the public sector (or, for that matter, many private sector DB schemes) as the employer contribution to such schemes is not defined per employee and therefore there would need to be a calculation of the notional value of the employer contributions, which would then be taxed.

It is important that such an incentive is equal for all workers - I still haven't seen any good reason why medium-high earners should get higher incentives?

In theory I agree with a system where everyone receives the same level of incentive, up to a ceiling. It would need to be proportionate, e.g. someone earning €100,000 gets the same rate of incentive as some earning €10,000; just ten times the amount. But that will only work if the regime at retirement is also overhauled. Simply standard-rating tax relief pre-retirement but doing nothing about taxes post-retirement doesn't achieve this. It just reduces the incentive altogether for a huge swathe of higher-rate taxpayers.

An exercise to standard-rate tax relief pre-retirement must be done in conjunction with a change to the taxation of such vehicles post-retirement - a separate rate of tax on the proceeds of such standard rated pension plans, perhaps?

 

[Complainer]

I don't agree that the current pensions industry workforce are creating no value. The current regime of tax relief creates a demand for pensions administrators and staff. Lots of people are employed to meet that demand.

I have to say that I'm still not getting any kind of clear picture of the value added by pensions administrators, all of whom are being paid for by pensioners, with the state subsiding this cost through tax relief.

If the demand is eliminated by an adverse change in tax relief, I agree that there would presumably be a demand for extra staff to adminsister all the extra savings & investments products. But I suspect that it wouldn't be the same people. So you'd have an lot of people losing their jobs because their skills are specifically pensions-related and the new jobs are created in the savings & investments industry. Fine from a big picture view, but not if you're one of the people who loses their pension administration job.

I can only imagine the kind of outrage/vitriol/hostility that would happen here on AAM if there was a proposal to keep a pile of public servants in jobs through a particular tax relief scheme. Strange eh?

But anyway, if the main arguement for tax relief is to keep a pile of administrators in jobs, I think the arguement has been lost already.

There would be serious implications. If an employer is currently making contributions to a pension plan for a high-rate taxpayer, presumably there would then need to be some form of BIK assessment on the difference between the standard rated tax relief and the high rate. Without wanting to get into any public vs private sector debates, there would be some huge practical issues in the public sector (or, for that matter, many private sector DB schemes) as the employer contribution to such schemes is not defined per employee and therefore there would need to be a calculation of the notional value of the employer contributions, which would then be taxed.

Indeed, the implications are very serious. But the more I think about it, the more some form of BIK assessment is needed. Why should an employer get away with this kind of tax-free payments to medium-high earners?

The issue is not so complicated in the public sector, as there are no employer contributions. Pensions are simply funded out of current expenditure, so there would be no BIK impact.

In theory I agree with a system where everyone receives the same level of incentive, up to a ceiling. It would need to be proportionate, e.g. someone earning €100,000 gets the same rate of incentive as some earning €10,000; just ten times the amount. But that will only work if the regime at retirement is also overhauled. Simply standard-rating tax relief pre-retirement but doing nothing about taxes post-retirement doesn't achieve this. It just reduces the incentive altogether for a huge swathe of higher-rate taxpayers.

An exercise to standard-rate tax relief pre-retirement must be done in conjunction with a change to the taxation of such vehicles post-retirement - a separate rate of tax on the proceeds of such standard rated pension plans, perhaps?

The proportionate rate sounds nice in theory, but again, I'm not so sure. The purpose of the state subsidy should be to ensure that people have a reasonable chance of providing for their own independence during retirement. I'd have thought a cap would important, so that once the state has ensured that a basic level of funding will be available, the subsidy cuts out.

Again, I don't quite see the value of complicating things with different tax rates. A simple tax system, whereby you pay appropriate rates of tax on all your income, regardless of the source seems better to me that the kind of relief and special deals that got us into this mess.

 

[Duke of Marmalade]

The issue is not so complicated in the public sector, as there are no employer contributions. Pensions are simply funded out of current expenditure, so there would be no BIK impact.

Actually the issue is hugely complicated in the public sector. Let's stick with private sector DB schemes for a moment. In determining BIK, the employer's contribution is almost irrelevant. In theory (ignoring PB rules) an employer could also not fund its pension promise. As it is, the quality of funding greatly varies between employer. In determining BIK what matters is what is the actuarial value of the increase in the promise year by year. This varies by several factors inter alia:

- The rules of the scheme

- The age of the person

- The level of inflation adjusting

- Crucially, the quality of the employer's covenant.

This last one shows how totally impossible it would be to come up with a fair determination of the BIK of a DB promise.

Incidentally, the BIK of the public service promise would be very high indeed.

Complainer, your arguments would be valid if we had a clean sheet, but we are were we are and Fergie has rightly highlighted this particular BIK aspect as a real showstopper for the standard rate relief brigade.

Having said that, we might be able to drop the relief to say 35% and live with the anomalies between DB/DC/PS.

 

[Conan]

Complainer says:
"Indeed, the implications are very serious. But the more I think about it, the more some form of BIK assessment is needed. Why should an employer get away with this kind of tax-free payments to medium-high earners?

The issue is not so complicated in the public sector, as there are no employer contributions. Pensions are simply funded out of current expenditure, so there would be no BIK impact."


If this is the quality of analysis being adopted on this issue we are really lost. A few points:

• If a BIK is to be applied to an Employer contribution into an occupational Pension Fund, then the pension/annuity would have to be paid tax free. Otherwise you have double taxation.
• Yes there is no employer contribution in the Public Sector, but that is not to say there is no "cost". The cost of the unfunded liability in the Public Service is huge (as identified elsewhere). So if the private sector had to suffer BIK, then equally so with the Public Sector (on some imputed basis). And since the typical Public Sector scheme is a "gold plated" scheme, the BIK would be much higher than a typical private sector scheme.
• The major differentiation in cost between the Public Sector and the typical private sector is the post retirement indexation. This is and has been hugely expensive and is behind the current charade to cut public sector costs but without cutting public sector pay rates. Now that the Gov't have banned upward only rent reviews could be also ban upward only bechamarking/indexation in the Public Service?

Conan

 

[LDFerguson]

On the jobs issue, it's not my primary argument. The current system encourages people to put money into pensions. That creates a need for people to administer such monies. Many of such people would lose their jobs if the system was changed, even though they might be doing their job efficiently, to the best of their ability etc. I'd always feel sympathy for someone who loses a job through no fault of their own.

Do I think that's a strong enough reason to maintain the status quo? No, I suppose not.

The issue is not so complicated in the public sector, as there are no employer contributions. Pensions are simply funded out of current expenditure, so there would be no BIK impact.

Of course there are employer contributions! The issue of how the employer chooses to fund a DB scheme (which ultimately all Public Service schemes are) is irrelevant. There is a big employer contribution to all Public Service schemes. The State schemes are just structured so that the employer contribution is paid post-retirement, instead of pre-retirement. But for such a proposal to be fair, the notional employer contribution would have to be calculated and taxed. Otherwise all public servants would be avoiding the new BIK while private sector workers would be subject to it, even though both benefit from an employer contribution to their retirement. That would be unfair.

The proportionate rate sounds nice in theory, but again, I'm not so sure. The purpose of the state subsidy should be to ensure that people have a reasonable chance of providing for their own independence during retirement. I'd have thought a cap would important, so that once the state has ensured that a basic level of funding will be available, the subsidy cuts out.

Yes - agree with this. What point the cap would be would be a matter of debate in itself.

Again, I don't quite see the value of complicating things with different tax rates. A simple tax system, whereby you pay appropriate rates of tax on all your income, regardless of the source seems better to me that the kind of relief and special deals that got us into this mess.

If you're giving someone an incentive to fund their retirement, then taking it back after retirement through taxes, it's not an incentive. The system would need to ensure that the incentive is not taken away after retirement.

 

[Duke of Marmalade]

This has me thinking that there is a very fundamental difference between a DB and a DC arrangement.

A DB arrangement is effectively deferred remuneration, and it seems to make sense that the remuneration would be taxed when received. Contributions should be an irrelevance. A person contributing 5% of her salary is really receiving a 95% salary, and it is reasonable that this is what should be taxed.

DC is clearly not deferred remuneration, it is simply savings. Therefore I don't think there is an anomaly with taxing an employer DC contribution at the excess of the marginal rate over, say, 35% as BIK whilst leaving the existing DB arrangements untouched.

If this encourages a return to DB, wouldn't that be a good thing?

 

[Towger]

The issue is not so complicated in the public sector, as there are no employer contributions. Pensions are simply funded out of current expenditure, so there would be no BIK impact.

I am speechless with this statement.... Well without breaking AAM rules.

 

[DerKaiser]

An incentive to save is certainly desireable in principle, but where does it come in the overall priority. No point in incentivising saving for tomorrow at the expense of basic services today.

Maybe we'll be even worse off in the future and those of us who can, should save for the rainy day?

It is important that such an incentive is equal for all workers - I still haven't seen any good reason why medium-high earners should get higher incentives?

The actual incentive is allowing you to distribute your earnings over your lifetime for taxation purposes. If medium/high earners already pay more tax, there is naturally a better saving in it from them.

This all stems back to people's view of fair share.

If I earn an average of 75k p.a. for 40 years and have no pension I pay €1m in tax over my life time. Putting aside €15k p.a. into a pension to provide a retirement income for myself will reduce my life time tax bill by about €175k.

If on the other hand I earn €35k p.a. for 40 years and have no pension I pay €200k in tax over my life time. Putting aside €7k p.a. into a pension to provide a retirement income for myself will reduce my life time tax bill by about €75k.

So what's the issue?

Is it that a guy paying €1m in tax gains €100k more from a pension than a guy paying €200k tax?

Could we say the €35k guy cuts his tax bill by almost 40% compared to 17.5% for the €75k guy?

Is it that the €75k guy pays an effective tax rate of 27.5% whilst the €35k guy pays 9%?

Yes, the higher earner benefits more in absolute terms from the existence of pensions.

But I think we need to ask is an effective tax rate of 27.5% on the higher incomes versus 9% on the lower income (Allowing for pensions) less fair than 33% on higher income and 15% of the lower income (a world with no pensions tax relief)?

I think some people have very entrenched views about what's fair but for me it's not all that clear cut.

 

[LDFerguson]

This has me thinking that there is a very fundamental difference between a DB and a DC arrangement.

A DB arrangement is effectively deferred remuneration, and it seems to make sense that the remuneration would be taxed when received. Contributions should be an irrelevance. A person contributing 5% of her salary is really receiving a 95% salary, and it is reasonable that this is what should be taxed.

DC is clearly not deferred remuneration, it is simply savings. Therefore I don't think there is an anomaly with taxing an employer DC contribution at the excess of the marginal rate over, say, 35% as BIK whilst leaving the existing DB arrangements untouched.

If this encourages a return to DB, wouldn't that be a good thing?

Okay, so following this line in thinking, would the resulting pensions from DC schemes be tax-free (as they are merely drawdowns of savings) and the pensions from DB schemes taxed?

 

[DerKaiser]

Okay, so following this line in thinking, would the resulting pensions from DC schemes be tax-free (as they are merely drawdowns of savings) and the pensions from DB schemes taxed?

That is correct, but I don't think you could argue that there is a fundamental difference in purpose or potential tax treatment between contributions under DB and DC.