Bee-Mail - 8 July 2011

PensionsGuru's 20/20 Vision 

I'm not one for writing, or even reading, any of the navel-gazing report-type noise that seems to come out all the time about what the government people should or shouldn't do about pensions. I've never really been into all the ins and outs of how much wood a woodchuck might chuck if only woodchucks could chuck wood and all that kind of stuff; it all seems so pointless. Political expediency seems to win the day every time anyway.

I did take a stand a few years ago though on the issue of the spread of means-tested support for the elderly and how it devalued people's pension savings. You probably know all about that, so I won't go on about it except to say that I'm pretty pleased the current government people are at last tackling this important issue.

Having said that I do have another bee in my bonnet now, though. And I've had a vision; a sort of 20/20 vision.

When I started work way back in the 1970s the basic rate of income tax was 35%. What that meant in practice was that after tax you got just under £2 in your pocket for every £3 you earned. (A bit more was sliced off for National Insurance, but that's another issue.) The basic rate was reduced to 34% in 1977 then to 33% in 1978. At that point (again ignoring NI) we basic tax rate payers got two in every three pounds earned to keep for ourselves; lucky us!

In 1979 the basic rate of tax went down to 30% and I remember people thinking at the time that that was simply staggering. It stayed at 30% until 1986 when it went down to 29% and then in 1987 it went down to 27% and in the following year, 1988, it dropped to just 25%. Again, I remember everyone being amazed by that.

Today the basic rate of tax is just 20% which, if you look at the historical record of tax rates, is very low. The trouble is we all seem to think that 20% tax is normal somehow. But what if it isn't?

In the 1970s it wasn't too hard to appreciate the benefits of saving in the tax-free environment of a pension scheme. £2 invested in a pension then got grossed-up to £3. A £2 investment by a basic-rate taxpayer in a pension today gets grossed-up to just £2.50. "Well, that's a bit whingy to bring that up", I can hear you saying, "we're better off with lower taxes even if it makes pensions a bit more unattractive, surely?"

Well yes of course, but what if 20% tax is not normal and we one day revert to a basic rate tax of 35% again? People these days paying basic-rate tax and saving in a pension would get 20% tax relief on their savings, but could end up paying a much higher rate of tax on their pensions when they come into payment many decades hence.

That's where my 20/20 vision comes in. In these post-computer, internet days we have access to ever more incredible computing power in every aspect of our lives. Our kitchen appliances have more computing power than the Apollo spaceships that regularly took trips to the moon in my first decade of employment. If we could apply some of the sophisticated computing technology we have available today to the pension tax system we ought to be able to guarantee to pension savers that the tax they will eventually pay on their pensions when they draw them would be at the same rate as the tax relief they were granted when they stashed the money away in the first place.

So someone saving in a pension now and getting 20% tax relief could be assured that they will only pay tax at 20% on the ensuing pension whatever the basic rate of tax is in the dim and distant future. That's my 20/20 vision. Now all we've got to do is get the government people to buy into it...