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Alistair Darling: Tax relief must be reformed

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Former Labour Chancellor Alistair Darling has attacked the pension tax relief system, fuelling speculation that the party will seek fundamental reforms if re-elected.

Earlier this month, Labour’s former Shadow pensions minister Rachel Reeves urged the Government to look at ways to make pension tax relief “more efficient, more effective and better value for the taxpayer” in incentivising people on lower incomes to save.

Speaking to Money Marketing at the National Association of Pension Funds’ annual conference in Manchester last week, Darling says the system is skewed in favour of the rich.

He says: “The big problem with pension tax relief is that the lion’s share goes to the people at the very top. That was not what was intended when the legislation was introduced.

“There is something very wrong there because the fundamental problem with pensions is that people on lower incomes are not saving, not the people who can well look after themselves.

“Of course, the way it operates is something that will be looked at on many occasions. I think if you were starting from here with a clean sheet of paper, you would not come up with a system where the people who get most of the money are the ones who had it in the first place.

“You would be wanting to help the people who you need to get into the pension system.”

Reflecting on Labour’s record on pension policy during 13 years of Government, Darling, who is MP for Edinburgh South West says: “I think stakeholder was initially quite successful, although the introduction of Isas probably damaged it because they are much, much easier to operate. The problem is there has been too much chopping and changing of policy.

“In relation to pensions, it is terribly important that we stick to the consensus. If people think the rules are going to change or the options are going to change, then they simply will not do anything.”

Darling says automatic enrolment, a key plank of the pensions consensus, must go ahead as planned as Government ministers consider providing further easements for small employers.

However, he says the Treasury will need to devise a “credible” plan for economic growth in order to prevent large numbers of opt-outs as the regime is rolled out.

He says: “Of course, the Government is thinking about delaying auto-enrolment in terms of the cost to employers and the potential saving to the Treasury but they need to press ahead.

“But it should not be overlooked that if the economy does not start growing and the Government does not produce a credible plan for growth, then take-up will inevitably be affected.

“Trying to tell people to save when every last penny is being spent on day-to-day necessities will be very, very difficult.”

When auto-enrolment is fully rolled out in 2017, the Department for Work and Pensions estimates up to 10 million savers, many of whom will be low to middle-earners, will join the pension system.

Darling says policymakers and the pension industry will need to ensure these people are able access financial advice and information.

He says: “There is a general problem that not enough people are getting decent advice because most people do not go anywhere near IFAs. By their very nature, IFAs will go to an audience that is willing to engage.

“What is needed is to increase the general level of awareness to a sufficient level so more people seek out professional advice in the first place. Where they get that professional advice from, whether it is an IFA or a provider, is of less importance to me.

“The real problem is whether there is sufficient financial knowledge and awareness among the population about financial issues. The answer at the moment is an emphatic no.”

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Comments

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  1. When will they get it into their heads – tax relief is not the main driver of contributing to pensions for low earners – its affordability.

    It doesnt matter how cheap the charges are or how much tax relief is avaibable if a low earner has a choice between eating now or saving in a pension that they may never draw on we not which one they will choose.

    With regards to higher rate tax relief – it is deferred tax which will be taken either in tax on income or tax on a death lump sum. This short term outlook, trying to balance the books by hammering high earners, is what puts people off pensions!!!

  2. The problem with politicians is that they have no idea what goes on in the real world when it comes to pensions as they sit with their cosy, extremely well funded final salary pension so they have no understanding or care as to whether tax is deferred or not.

    It’s simply about how they can grab more and more money off people who have strived to earn a good income and waste it on the bloated public sector.

  3. I agree. The problem is that the idea of saving for the future out of today’s income has to be sold to people. They don’t just wake up one morning and think ‘I’ll start a pension today’.
    As bad as the industry was pre stakeholder at least the idea of saving was actually promoted to people.
    It’s certainly not fair that a higher rate tax payer who accumulates a decent fund could end up paying tax twice on the same income.

  4. “Reflecting on Labour’s record on pension policy during 13 years of Government, Darling, who is MP for Edinburgh South-west says: “I think stakeholder was initially quite successful, although the introduction of Isas probably damaged it because they are much, much easier to operate. The problem is there has been too much chopping and changing of policy.”

    Well, the Stealth Tax in 1997 didn’t help (strange that people in Final Salary Schemes were not affected….and ohhh, most Final Salary Schemes are Public Sector ones…..).

    You didn’t kill off private sector money purchase plans with A-Day – or the various other changes – so lets change the Tax relief basis,,,,,that surely will kill them off.

    The really worrying this is, the current government seems to be as inept and stupid as the previous government.

    Why would anyone save into a Pension, for 40+ years, when some idiot in a Gold Plated Final Salary Scheme, at a stroke of a pen, could destroy your savings?

  5. “The big problem with pension tax relief is that the lion’s share goes to the people at the very top.”

    Is it also a problem that the lion’s share of the Treasury’s tax take also comes from the people at the very top?

  6. Well thought out argument by Darling, but as usual, totally out of touch with reality
    People who save will ultimately have money to spend. Therefore encourage savers who can, to accumulate funds which are highly taxed and the bit that’s left which they can and do spend, gets recycled back into the economy by employing those on lower incomes, whether directly by way of staff, or indirectly by way of purchases.
    Either way, it all ends up supporting retired MPs, as I doubt they personally contribute too much into their pension funds, so if the MPs are going to rely on the section of the community who currently cant afford to pay into a pension fund to pay for the MP’s pension, good luck!

  7. Would only be fair if tax on pension income in retirement was capped at the basic rate but since when have politicians been fair?

    Purely and simply a policy designed in the hope of winning votes by hitting higher earners with no thought given to its effect in the real world…. but then when has reality had anything to do with politics?

  8. The ‘stealth tax’ of 1997 did far less damage to pension schemes than the actuarial profession who failed to forsee increased longevity and allowed schemes to take extensive contribution holidays.

  9. Terence P. O'Halloran 28th October 2011 at 10:40 am

    Alistair Darling is the man who supported the Labour Manifesto pledge to “nationalise the banks” in 1983. He almost succeeded along with Gordon Brown. Political myopia seems to be an incurable but highly virulent disease, almost incurable, and dillusionary in its symptoms.

    The NAPF statement that “pensioners are doomed to poverty in retirement timing” is opportunistic as a herald to the “great benefit” that a state sponsored pension “NEST” can bring to the unfortunate and savings shy workforce. Ex trade union and neo communist Joanne, the NAPF CEO would say that wouldn’t she?

    What Alistair and Joanne, and their cohort, fail to recognise is the contribution made through NI which is sacrosanct through legislation in providing a pension for ALL workers, of whatever class, in return for circa 18% of band earnings; heavily subsidised by the highest earners and their employers.

    Pension saving is, as many here have said, not a matter of tax relief but affordability. The relief may entice payments to pensions from higher rate tax payers but only to the benefit of the wider community from the collective investments that stem from those contributions, a large portion of which end up in gilts supporting the nation.

  10. He says: “The big problem with pension tax relief is that the lion’s share goes to the people at the very top. That was not what was intended when the legislation was introduced.

    Wottamuppet!!

    I will not hold my breath until he says the FSMA 2000 isn’t doing what was intended.

    Jeez, we have no chance with politicians like this and they all appear to speak through orifices other than their mouths.

  11. The government needs money NOW to balance the books so the simple answer could be to reduce tax releif to 10% for all income levels (to encourage input) and reduce tax releif. To give a carrot for the future at retirment AFTER age 66 not 55 make the first £30,000 of pension tax free. That would help the chancellor, help the lower earners and keep people off benefits at retirement too. Or is that too simple!.

  12. Good Afternoon,I trust you are all well.I see pension saving is at a 55 year low.Why could that be let me think,some of the highest charges in the world,usually pathetic investment returns and an even more pathetic annuity at the end of the miserable contract.My favourite quote at the minute is that of Joanne Segars chief executive of The National Association of Pension Funds.In a recent article in the Telegraph which was headed up -Savers hit by hidden fees on pension funds.In this article this disgraceful woman said -So if we could start to act in a slightly more honest way,only slightly,what is wrong with total transparency and how has your industry been allowed to get away with this attitude for so long? Could it be because we have a regulator that could not give a tinkers cuss?

  13. It is quite interesting that even with a recession going on, more and more high earners seem to be working less and earning less. The UK has sent a clear message to those that wish to succeed that they will receive a royal kicking for their trouble. Weekend starts here.

    And yes we are all well Lesley, thanks for asking, sorry you have been traumatized by the pensions industry. Please be assured there is far worse to come.

  14. The reasons that people at the lower end of the economic scale aren’t saving for retirement are:-

    1. Your lot totally buggered the economy whilst you were in office. It’s people on moderate to low earnings who are now feeling the pinch most acutely.

    2. Your lot inflicted on the pensions framework change after change after change so that people now are totally disillusioned with and untrusting of anything to do with pensions. On top of which, what your lot steadfastly refused year after year to do anything about was to address the biggest turn-off of all, namely the annuity trap.

    3. The reason why higher earners get the lion’s share of tax relief is because otherwise they’re subject to the highest rates of income tax and their employers’ NI bill is greatest. They also have more disposable income and tend to be more financially astute. The current tax relief system isn’t a failure just because higher earners are still in a position to avail themselves of it whilst those on modest incomes are not. Why should higher earners be denied access proportionately to the same levels of relief as those on lower incomes?

    4. To cap it all, all your lot managed to come up with was NEST in preference to a private sector solution.

    As for seeking out advice, Mr Darling, in case you weren’t aware, providers aren’t allowed to provide advice and advisers will need to charge more than most medium to modest earners will consider affordable.

    And the reason ISA’s are relatively popular is because they’re subject to the least degree of government control and interference.

    For heaven’s sake ~ could anyone possibly be more out of touch with or in denial of the realities of the savings chasm?

  15. While they were in power: 18 pension ministers in 13 years

    Since they have been out of power: 3 shadow pension ministers in 18 odd months.

    Publicly: Disagree with the indexation switch from RPI to CPI

    Privately: Would have done the same thing and have done so to the Labour support staff scheme (switched from RPI to CPI) but will not answer any questions on their own hypocrisy when asked by tehir own staff

    See a problem Alastair??

  16. the ineptitude and arrogance is mindblowing…..so reduce tax relief on pensions to 20%….senior people in companies stop using them….they then self-reference and think pensions are not the answer full stop…and stop promoting…which leaves compulsion…which means a monster NEST scheme….now i see the logic

    oh and by the way to limit tax relief to 20% they would need to “tax” pension contributions made by the employers…because if they don’t all companies will simply do salary exchange…and taxing company contributions also means taxing the DB equivalent value….maybe this is the way to kill off the public sector stuff. If only the TUC could see that removing tax relief for higher earners in private sector DC will kill off the public sector DB

  17. Gareth E K Smith 28th October 2011 at 5:10 pm

    The sooner it is reformed the better why should the middle £25,000 a year earner subsidise someone who can put up to £50,000 a year in a pension and receive higher rate tax relief. My worry is that the treasury will see cutting the low hanging fruit of pension tax relief as a way of balnacing the books. I personally believ that the net tax relief shouldn’t be cut but distributed more fairly.

    I have allways thought tax relief should be given on size of fund perhaps age related, i.e match contributions until fund reaches say £18K triviality limit, 50% match until fund reaches £50K and withdraw it completely at say £100K.

    Also the government could think long term and guarantee annuity rates for first portion of funds.

    It would work out cheaper in the long run as less means tested benefits would be paid in retirement.

    Finally, there is a lot of nonsense spouted about low income earners and that they have no money to save. I came from a tied background and millions saved back then but due to over regulation that savings culture was lost. People will get back into the habit of saving if there is an industry providing that advice.

  18. Why would anyone listen to this muppet – the worst Chancellor since Gordon Brown.

    I’ll tell him what’s not fair ! A self-employed person like me who pays just a little less in NI contributions so that the State can pay me nothing if I earn nothing (no dole money), nothing if I am ill and no SERPS/S2P at retirement even if I pay 40% tax on my earnings for 49 years. Yet the feckless and lazy on incapacity benefit and even stay-at-home carers earn S2P and can now claim their pension after 30 years (even when most of the qualifying years have been accrued staying at home and bringing up kids).

    And, just to explain to this moron, tax relief isn’t the government GIVING anything. It is the government choosing to take a little less from those people who work hard to earn a slightly bigger crust.

  19. Unbelievable nerve!
    When Brown sacked Frank Field and set an unrealistically low charge on Stakeholder the predictable result was:

    Average Joe would no longer receive professional advice.
    Average Joe would not invest in pensions as a result.
    Savings would remain static and all in the face of an ageing population.

    One other result also happened. The total amount of savings remained static (rather than growing each year) as the demographic of that amount changed as there was a flight to the wealthy. The proportion of the money made up of the wealthy has grown with the amount from the rest reducing.

    Yet that was not against what Labour wanted to achieve. Each budget attacked savings and investment whilst easing credit, leveraging and borrowing. Brown say tax efficient savings as the enemy and borrowing as the way to a spending boom where he got the VAT.

    The reason for the drop in rate of savings since the late 1990s, lack of advice or average Joe is not as Darling thinks, the world growth slowdown that has happened recently.

    Was bare faced nerve to try and paint the picture he is.

  20. How can Darling suggest that the introduction of ISAs had a negative impact on Stakeholder pensions after a positive start? ISAs were introduced 2 years before Stakeholder! The guy is nuts!

    It also amazes me that there are one or two on here that think that it is fair for higher-rate taxpayers to only get the same relief as basic-rate payers despite the fact that they pay more tax!

    As for having tax relief linked to the size of your pot! The whole point of TAX relief is that it’s liked to your personal income TAX.

    Leslie, when I saw your name, I feared the worst! You cause enough negativity on ThisIsMoney.co.uk without infecting this website with your venom too. This woman has to be the most negative person I have ever come across when it comes to the finance industry. Constantly spouting rubbish about ridiculously high charges on pensions, showing that she has little knowledge regarding how modern pension plans work….. Wait for her to start about how plans in Denmark are so much cheaper, neglecting to mention the lack of a fair comparison….

    Have a look at the comments on ThisIsMoney if you’re curious, she is a self-styled ‘do-it-yourself’ merchant.

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