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A golden chance to correct a pensions unfairness

Summary:
We are not, particularly, in favour of limits on what may be saved into a pension pot. If that’s how people wish to redistribute their lifetime income, to smooth consumption out over time, then that’s fine by us. We’re also not sure what the problem is with the higher savings rate that results from people, well, saving more. Even the tax issue seems trivial to us, for pensions tax relief is more a delay on the date it is paid, not an exemption - pensions incomes are taxed after all, even if possibly at lower marginal rates.We’ve also noted several times that the current limits on the size of pensions pots have taken us well over the peak of the Laffer Curve - we’ve had repetitive stories of doctors refusing extra work, even during the pandemic, because of the tax rates applied to their

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We are not, particularly, in favour of limits on what may be saved into a pension pot. If that’s how people wish to redistribute their lifetime income, to smooth consumption out over time, then that’s fine by us. We’re also not sure what the problem is with the higher savings rate that results from people, well, saving more. Even the tax issue seems trivial to us, for pensions tax relief is more a delay on the date it is paid, not an exemption - pensions incomes are taxed after all, even if possibly at lower marginal rates.

We’ve also noted several times that the current limits on the size of pensions pots have taken us well over the peak of the Laffer Curve - we’ve had repetitive stories of doctors refusing extra work, even during the pandemic, because of the tax rates applied to their associated pensions contributions.

However, there is an opportunity here:

A healthy 65-year-old who bought an annuity for this upper limit would receive a payout of £28,000 a year, according to Canada Life, a pension provider. However, those with gold-plated defined benefit pensions can achieve nearly double that while remaining under the lifetime allowance.

The current limit translates to an annual retirement income of around £53,600 for those with defined benefit pensions. For DB schemes, the lifetime allowance is calculated by multiplying retirement income by a factor of 20.

DB schemes tend to continue their existence in the public sector only. Which causes a problem. As with so many economic points there is a tension here between efficiency and equity. That second point here being that it’s just unfair that a civil servant or public sector employee should be able to rack up a pension at a lower tax rate than a private sector one.

As Sunak considers whether to change, freeze, otherwise limit, the allowable size of the pension pot before punitive taxation is applied he should insist that those DB - and thereby largely public sector - pensions be valued by the same calculation as private.

If we really want to put the cat among the pigeons we could value DB pensions using the Ogden Rate. OK, probably a step too far but it would be fun to hear the squealing and we could always then move back to the equitable position of valuation just like any other pension pot.

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Tim Worstall
Tim Worstall is a British-born writer and Senior Fellow of the Adam Smith Institute. Worstall is a regular contributor to Forbes and the Register. He has also written for the Guardian, the New York Times, PandoDaily, the Daily Telegraph blogs, the Times, and The Wall Street Journal. In 2010 his blog was listed as one of the top 100 UK political blogs by Total Politics.

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