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Getting down to brass tax

Axing higher-rate tax relief would allow the basic state pension to be raised

Now that the Turner recommendations are known, the next few months will see the vested interests talking about what combination of reforms will produce the best results.

Life companies and the National Association of Pension Funds want to see more incentives to encourage people to make private provision. Pensioners’ lobby groups such as Age Concern and Help the Aged are calling for higher basic state pensions linked to earnings rather than prices. The unions claim that employers should be compelled to contribute to employees’ pensions and the general public want something for nothing.

But amidst all the lobbying, there are some irrefutable facts which the Government cannot ignore. These have a moral dimension and go to the heart of a fair tax and benefit system and what sort of society we want.

The big question that nobody wants to ask is, why should we give huge amounts of tax relief on pension savings to the relatively wealthy top-earning half of society, funded by higher income tax paid for by the lower-income half of society?

Figures from the respected Pensions Policy Institute say it all. The PPI estimates that the loss to the Exchequer from pension tax relief is running at 19bn a year, equivalent to nearly 5p in the pound on basic-rate tax.

If you add in the tax relief on Isas and Peps, most of which are used by the relatively wealthy middle classes to save for retirement, the cost is even higher. Bear in mind that these figures have been calculated after Gordon Brown’s so-called raid on pension funds.

Meanwhile, successive Governments have said it costs too much to increase the basic state pension to a level where it gives people even a survival standard of living. The cost of state pensions is running at 61bn a year. But if the Government were to make pension saving compulsory, there would be no need for tax relief , except arguably as a business expense for employers.

The basic state pension, now 82 a week for a single person, could be increased to at least a minimum guaranteed level of 109 a week at little or no extra cost.

Half of all pensioners are currently eligible for some form of state benefit, so raising the basic pension to 109 a week would certainly not cost an extra 19bn a year – the amount saved by abolishing pension tax relief.

There is also evidence to suggest that the relatively wealthy middle classes will continue to save for retirement, regardless of whether or not they get tax relief.

The half of the population which the Government wants to encourage to save are those in the lower income bracket, most of whom have no private pension provision at all. Indeed, the way that social security benefits are structured, there is no point in most of these people saving, even assuming they could afford to do so. Most of these people do not save for the simple reason that, after they have paid their basic living expenses, there is nothing left to save.

The Government needs to look at the taxation system and the official figures say it all. The lower-income half of the population – largely pensioners, school leavers and part-time workers – contribute only 11 per cent of the total income tax take of around 123bn. In other words, you could release some 13 million of the 26 million taxpayers from taxation at a cost of 13bn.

These are crude figures but they make a compelling argument for a total reform of the tax and benefit system, of which pensions are only a part. As many accountants pointed out when Gordon Brown brought in the hideously complicated tax credit system, why not just let people pay less tax?

All the time the Government continues to take money from people who are fundamentally poor, it is precluding these people from providing for their own retirement and taking away their self-respect. It is time the Government dealt with this problem. If Tony Blair does not have the courage to do so, then hopefully David Cameron has. Money Marketing50 Poland Street, London W1F 7AX


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