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L&G: Pension tax relief is ‘designed by the rich, for the rich’

Legal and General chief executive Nigel Wilson says pensions tax relief for high earners must be addressed in future pension reforms, describing it as a “system designed by the rich, for the rich.”

Writing in London paper City AM this morning, Wilson says: “In pensions, a regressive system of tax relief at the marginal rate gives an over-generous subsidy – 70 per cent, or £25bn out of the £35bn paid in pensions tax relief goes to higher-rate tax payers. This is a system designed by the rich, for the rich, and will have to change in the next wave of pensions reforms.”

The claim forms one of a number of suggestions Wilson argues should be applied to an overhaul of public spending on welfare in order to replace universal means-testing with a ‘contributory principle’.

Wilson also argues the “plumbing” put in place through auto-enrolment should be used by government to administer a new system of welfare top-up. 
He says: “We need to consider how to use the plumbing that has been put in place for auto-enrolment. Systems which connect every employer in the country to a pensions provider will soon be in place. 

“The can easily be adapted to accommodate welfare top-ups, avoiding the usual IT problems encountered by government projects.”
Wilson argues auto-enrolment systems should be used to support “contributory welfare top-ups” encouraging individuals to share long-term illness and disability risks with the state.

He says reforms need to “combine a fair state National Insurance system, which provides an underpin, with an enhanced and suitably incentivised top-up, which can be through public or private sector”.


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There are 21 comments at the moment, we would love to hear your opinion too.

  1. He really doesn’t get it. To do this the government would have to tax pensions as a benefit in kind which would seriously damage the central and local government employees.

    They are much more likely to let the £40k limit wither on the vine so that in real terms it reduces to £35k over 5 years and £30k over 10 years

  2. L&G has on previous occasions tried hard to give the impression that they are an old style Soviet Commissariat. It doesn’t seem to occur that these ‘rich’ people – notwithstanding their pension tax relief, still contribute most in tax. Indeed The highest-earning 1 per cent of Britons pay almost 30 per cent of all income taxes, according to research.

    Since 2000, the share of tax paid by the highest earners has risen from 22.2 to 27.7 per cent. Research by Oriel Securities shows the 3.7million who earned more than £35,000 and pay 40 per cent tax, hand over £57billion in tax, 34 per cent of the total.

    Then consider that these ‘rich’ people will also pay more tax on the pension when in payment and this numptie – who runs one of the biggest firms in Britain, wants to kill the goose that lays all the eggs. No wonder I have always had such a low opinion of the management of life offices. This is nothing but an outrageous plug for the self-interest of L&G, dressed up as concern for the ‘poor people’ for whom they have in the past had no compunction in ripping off.

  3. Harry – you’re only telling half the story. Yes, share of tax paid by higher earners is going up – tha’ts because the share of the national income earned by higher earners is going up.

  4. Can’t we just cut to the chase and say, the good/bad parts of higher rate pension tax relief (depends whether you have significant surplus money to put into pensions or not) are on the way out. It’s not rocket science, think about it, recent budget, pension allowance down, ISA allowance up. Give it a few years and you hardly be able to tell the difference.

    If you want to accelerate people on low incomes to provide them with a self sufficient pension and not be long term reliant on support benefits, turn it on its head and give the lower income earners higher rate tax relief to encourage them to do it.

  5. Every now and again L&G come out with this sort of sanctimonious claptrap. The trouble is some people seem to believe it (present company here not included of course).

    By the way Harry, I did try to reply to your comment, the other day, about my not having missed the point (what it was I can’t remember now though) but I seem to have a lot of problems with the MM website in signing in or getting comments posted. It could just be my PC but I would be interested to know if others are having the same issues.

  6. Smithy0364

    So what’s wrong with that? It’s economics – if they wouldn’t be worth it they wouldn’t get the pay. Is a footballer worth the huge amounts that seem to be paid to footballers? Real Madrid obviously feel that Bale is worth £300k per WEEK!

    If thee people at PLCs, hedge funds etc wouldn’t be deemed worth the money they’d soon be looking for alternative employment.

    I know quite a few who earn over £150k p.a – I’ll bet you wouldn’t want their workload or be prepared to put in the hours that they do,

    These are the people who not only contribute most in tax – they also contribute most to GDP.

    This is such a typically British (and socialist attitude). So everyone should earn less. The tax trawl will then be less and what about the benefits that the higher taxpayers fund? That too will have to be cut far more severely than is now the case. There would be no winners – except for those who revel in the shadenfreude.

  7. I think the point that Smithy0364 is making (although I stand to be corrected) is that the gap between the higher earners and the rest has become enormous over the last 10 to 20 years. And I can’t agree that evreyone earning this money is worth it. Paul Flowers? Hector Sants? Fernando Torres?

    Some people do work very hard, are very talented at what they do and are ambitious enough to take action and society needs these people, but there are an awful lot that benefit from the old pals act and work the system.

    And as for footballers wages. Yes it works for some football clubs to pay stupid money but many others come a cropper over it and, quite frankly, the whole thing is immoral and is taking advantage of football supporters who have no (emotional) choice but to stump up one way or another by paying thousand each year going to matches or through TV subscriptions. If you are a lifelong supporter you cannot just turn it off and not watch any more.Clubs know it and exploit it mercilessly. This is an example fo where the good things about capitalism get twisted and abused.

    I just realised we may have gotten a little off point.

  8. @Patrick Schan

    Occasionally i have problems posting on MM articles. All i get is a “Sorry there has been a problem posting your comment” warning after hitting submit. I haven’t been able to comment on a few articles because of this. No amount of closing down the browser and reopening MM seems to sort the issue then all of sudden everything is fine.

  9. Nice to see Harry has turned a thread about pensions tax relief into a party political broadcast for the Conservative Party. As regards tax relief, I do not see anything wrong in higher rate taxpayers getting more tax relief on pension contributions as long as the income tax system is progressive rather than the current emphasis on indirect taxation. If tax relief leads to greater investment in the UK economy via pension contributions then the country benefits. For ultra-high income earners the pension tax relief and ISA allowances are insignificant costs to the Treasury compared to the losses they suffer by not collecting taxes that should be paid by these people efficiently and accurately. I would rather see the focus on GAAR continued and stepped up further, as the adverse publicity resulting from cuts to pension tax relief for higher earners can possibly lead to a reduction in pension contributions for middle England aspirants when they read the headlines about taxing the rich on pensions. However, I totally agree with Harry’s assessment of L & G’s motives.

  10. @Nick Wardle

    Thank you Nick. That is one of the problems I have so at least I know it is not just me.

  11. A plug for the Conservative Party? Heaven forbid! I don’t vote at all – it only encourages them!

    @Nick & Patrick

    What a relief that I am not alone in having these intermittent problems. I have spent a significant sum with my IT guy trying to sort things out. Oddly the problem doesn’t occur with Google only IE. I haven’t tried other browsers. In fact this message was originally sent via IE with the following message:

    Comment not submitted

    There was a problem submitting your comment

    It was therefore sent via Google with no problems.

  12. ” taking advantage of football supporters who have no (emotional) choice but to stump up”

    “No emotional choice”? This is the sort of antihumanist claptrap that a strawman baddie in an Ayn Rand novel would come out with. Jesus wept. Of course they have a choice.

  13. 1an H0m3w00d1234 17th April 2014 at 4:55 pm

    abacus test comment

  14. @Sascha Klauß

    Congratulations on being in complete control of your emotions 100% of the time. you must be very entertaining company.

  15. I’m afraid I have to agree with Sascha Klauß. Sure you can be interested in football (personally I find it boring as I’m an F1 fan) but getting emotional? Please! Get a life. It’s only sport. (Which in my book means it’s a game). There is far too much mawkishness around nowadays. Where is the old ‘stiff upper lip’?

    Anyway this is a bit of the subject. Turning back to the points made by Smithy0364 and Brian Gannon. I’m certainly no apologist for the Tory party, but equally I get very impatient with the Socialist politics of envy.

    Please remember that the highest-earning 1 per cent of Britons pay almost 30 per cent of all income taxes, according to research.

    The 308,000 on the old 50p top rate – who earned more than £150,000 – paid £47billion a year to the Treasury. Once you factor in national insurance, for each £1m paid as a bonus the employee receives £480,000 and the Exchequer gets £658,000.

    The top marginal rate of income tax is actually 58 per cent, the highest in the developed world. No wonder we are losing mobile high earners with rates like that.

    Furthermore according to the latest research (Universities of Oxford, Zurich & California) these high earners are also the hardest workers putting in far more hours than the lower paid. The old 19th Century idea of the rich leisured class has now been turned on its head and the leisured class is now those on lower incomes.

    So these people contribute the most to the exchequer, most to the national GDP and the overall wealth of the country and are yet pilloried and squeezed. We seem to be regressing to the Wilson ear when talent just left these shores and our ‘Brain Drain’ became a serious problem.

    The big problem in the UK (as say compared to the USA) is that in the US when a man passes by in his Ferrari and onlooker thinks “If I work hard, one day I might be able to afford one of those”
    In the UK the onlooker generally thinks “Look at that rich bas—rd, why should he have one of those?”

  16. @HarryKatz, I take on board your not being an apologist for the Tory Party, and although there is little doubt that higher rates of tax act as a disincentive to effort and enterprise, one still has to look at what is left after tax and take a view as to whether people earning such high bonuses (as stated in your example) are to be given sympathy. When I look at investment performance I always look at the net returns after tax and charges. I would rather have a 7% net return on a unit trust than 2.5% tax free in a cash ISA. So in that vein surely the net return of £480,000 on a £1 million bonus is preferable to a £10,000 annual salary free of all tax. For those who resent paying such high rates of tax there are plenty of creative ways that the more resourceful use to avoid paying the tax due. And where tax cannot be avoided I still find it hard to see how any sympathy is due. I don’t think a belief in more progressive tax systems is about socialist politics of envy, surely it is more about taking a view on what is fair and what is unfair. It can become emotive for sure, but for me it is more about the fact that the Treasury needs receipts and then working out the best and fairest way of collecting taxes whilst not harming the economy or the interests of individual citizens. It is just about opinions really at the end of the day isn’t it?

  17. I’m afraid opinions don’t pay the rent. Like any enterprise – if the Treasury needs funds there are always two ways to achieve this – tax more, or spend less. I’m sure you will have as many ideas as anyone of where savings can be made. I have a pretty long list myself.

    You mention progressive tax, but that is not necessarily a given. There is a movement towards a flat tax and some countries have already adopted it. The truism is that if the tax rates are considered onerous the actual trawl decreases and the opposite is also true. The Thatcher era rather proved the point.
    Your speak of fairness yet how fair is it to penalise the biggest contributors more and more? If someone is on a £10k salary economics would dictate that is all they are worth.
    Perhaps we should stop all foreign aid and divert this money to education until more are capable of rising above such low levels of income.

  18. @HarryKatz, I guess we have a lot to thank Mrs Thatcher for…. selling the national housing stock, selling the telecommunications, electricity, gas and water distribution networks, selling the rail network off, spending the once in a millennium North Sea Oil bounty, creating a “me-me-me-me-me-culture”, double digit inflation as late as 1990, ceding power to the European Union, a focus on get-rich-quick financial services schemes rather than long-term investment in manufacturing and R & D, and inflationary wage increases for directors and workers alike. People stopped making and designing things and became financial advisers, investment bankers, property developers and estate agents. The policy of Monetarism was no more or less useful than supply side Keynesian economics in managing the economy. So it IS a matter of opinion not fact as to which tax strategy works Harry. Flat tax has pros and cons, progressive taxation has advantages and drawbacks. Indirect taxation gives people more to spend and more choice as to how they spend it but causes price rises and does not redistribute wealth. Choice or control? It IS about opinion. Quantitative Easing or Spending cuts? It is about opinion. This is the biggest economic experiment ever undertaken, so there are no certain outcomes and no proof that one method of tax and spend is better than another. We both agree that people need rewarding for working hard and being talented, and we probably both agree that nobody should prosper from laziness or incompetency. It is a matter of degree as to how much spending and taxation there should be, and different circumstances require different tactics and strategies. And fairness is about personal value systems as well as absolutes. So my opinion about what is fair is bound to be different to yours since we do not seem to share that many of the same values. Hence the debate.

  19. @Brian

    Perhaps unusually I am one who was in industry – manufacturing, before entering financial services. Indeed my firm won an export award. We sold out – it still exists. But I guess I’m not untypical insofar as I left productive industry and became a parasite. The factory was in Lancashire and in those days the conventional wisdom was that money was made in the North and spent in the south. Now it is made and spent in the south.

    The demise of industry in general wasn’t down to Maggie – for that you can blame a combination of the Unions and the rise of China. The Unions killed the British car industry – now we just screw them together and the profits go to the foreign owners. Much of the clothing industry (cottons in the case of Lancashire) is now imported from Asia.

    It’s all about economics and to an extent – progress. When I was a kid I was told to eat up my dinner as there were thousands starving in China. So I guess that has been progress.

    I also agree with your point about our squandering of our oil revenues, but that was by no means confined to Thatcher. Let’s see what they do with the proceeds of Fracking – if ever the numpties in Westminster can make a positive decision to get cracking (and fracking).

    Yes I also agree that Rail privatisation was not a good thing (or any other transport privatisation). It has left us with the dearest transport in Europe, if not the World. But that shouldn’t detract from the many achievements in that era that put us back on a decent path after years of Socialist vandalism. This was repeated in the Blair/Brown years, but unfortunately we have had a limp wristed alternative since which used to be indecisive, but now just can’t make up its mind.

    Again I agree it’s all opinion, but as I said opinion doesn’t really get results – that is well illustrated by the plethora of opinions in the present coalition.

    As far as fairness is concerned – when has there ever been fairness? Life isn’t fair. The good die young and the worthless live to a ripe old age. Our school system looks to fairness – everyone wins a coconut and standards are down the tubes.

  20. In the UK at the moment about 50% of the population are net beneficiaries of the state system. In other words they get more out than they put in. This reminds me of an old story. It was allegedly told by an economics professor to his students in the US. Goes something like this:

    Suppose that every day, ten men go out for beer and the bill for all ten comes to £100. If they paid their bill the way we pay our taxes, it would go something like this…
    The first four men (the poorest) would pay nothing
    The fifth would pay £1
    The sixth would pay £3
    The seventh would pay £7
    The eighth would pay £12
    The ninth would pay £18
    The tenth (the richest) would pay £59
    So, that’s what they decided to do.
    The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve ball.
    “Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily beer by £20?. Drinks for the ten men would now cost just £80.
    The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still drink for free. But what about the other six men? How could they divide the £20 windfall so that everyone would get his fair share?
    The bar owner suggested that it would be fair to reduce each man’s bill by a higher percentage the poorer he was, to follow the principle of the tax system they had been using, and he proceeded to work out the amounts he suggested that each should now pay.
    And so the fifth man, like the first four now paid nothing (100% saving)
    The sixth now paid £2 instead of £3 (33% saving)
    The seventh now paid £5 instead of £7 (28% saving)
    The eighth now paid £9 instead of £12 (25% saving)
    The ninth now paid £14 instead of £18 (22% saving)
    The tenth now paid £49 instead of £59 16% saving)
    Each of the six was better off than before. And the first four continued to drink for free. But, once outside the bar, the men began to compare their savings.
    “I only got a pound out of the £20 saving,” declared the sixth man. He pointed to the tenth man, ”but he got £10!”
    “Yeah, that’s right,” exclaimed the fifth man. “I only saved a pound too. It’s unfair that he got ten times more benefit than me!”
    “That’s true!” shouted the seventh man. “Why should he get £10 back, when I got only £2? The wealthy get all the breaks!”
    “Wait a minute,” yelled the first four men in unison, “we didn’t get anything at all. This new tax system exploits the poor!”
    The nine men surrounded the tenth and beat him up.
    The next night the tenth man didn’t show up for drinks so the nine sat down and had their beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!
    And that, boys and girls, journalists and government ministers, is how the tax system works. The people who already pay the highest taxes will naturally get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.

  21. @ Grey Area

    Promotion to Purple Area! Yes I too have seen that one. Thanks for bringing it up. It might get the socialists to see the light.

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