Death and Taxes

29 April 2009

The proposal to impose a tax rate of up to 30% on pension contributions for higher earners seems unlikely to prompt a resurgence in Government popularity. Indeed, the Government's own online pensions page makes no mention of the proposal.

To be fair, HMG has said it will consult on the idea, so the plans are not necessarily set in stone. But reaction so far has been colder than a witch's nipple. Apart from the impact on the pockets of the wealthy pension saver, (such as your average national newspaper editor), the pension industry is up in arms about the flagrant contradiction of a longstanding tenet of UK pension design – namely that, unlike many regimes elsewhere in Europe, UK pension contributions are tax exempt, as are investment returns, but pensions in payment are subject to income tax. Any change is bound to be seen with, at best, concern and, at worst, horror, by the UK pensions industry.

So, partly in a no doubt vain attempt to add an element of balance to the debate, but mainly just to be contrary, can I recommend this interesting, if rather technical, OECD paper from 2001? It suggests that the pre-paid tax model has a number of features to recommend it – notably that it brings forward the taxation income deferred under the present system, reduces the scope for tax evasion by collecting the money up front, and raises more revenue from those who are higher rate tax payers in their working lives but revert to basic rate tax in retirement.

Politically, there is a fascinating parallel with the political debate in 1997, when the soon-to-be-ousted Conservative administration proposed something similar through its Basic Pensions Plus idea, to the scorn of the then opposition.