Recently, I had a sort of 20/20 vision. When I started work back in the 1970s, the basic rate of income tax was 35 per cent. That meant you got just under £2 in your pocket for every £3 you earned. A bit more was sliced off for National Insurance – but that is another issue. The basic rate was reduced to 34 per cent in 1977 then to 33 per cent in 1978. At that point, again ignoring NI, we basic-rate taxpayers got two in every three pounds earned to keep for ourselves. Lucky us.
In 1979, the basic rate went down to 30 per cent and I remember people thinking at the time it was staggering. It stayed at 30 per cent until 1986, when it fell to 29 per cent and then in 1987 it dropped to 27 per cent. In 1988, it went down to just 25 per cent.
The basic rate of tax today is just 20 per cent, which, if you look at the historical record of tax rates, is very low. The trouble is we all seem to think 20 per cent tax is normal. But what if it is not?
In the 1970s, it was not 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.
That is a bit whingey to bring that up, I can hear you saying. Surely, we are better off with lower taxes, even if it makes pensions more unattractive.
Well, yes, but what if 20 per cent tax is not normal and we one day revert to a basic-rate tax of 35 per cent? People these days paying a basic rate of tax and saving in a pension would get 20 per cent tax relief on their savings but could end up paying a much higher rate of tax on their pensions when they come into payment decades hence.
That is where my 20/20 vision comes in. In these technological days we have access to ever more incredible computing power in all aspects 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.
Someone saving in a pension now and getting 20 per cent tax relief could be assured they will only pay tax at 20 per cent on the ensuing pension, whatever the basic rate of tax is in the dim and distant future. That is my 20/20 vision. Now all we have to do is get the Government to buy into it.
Steve Bee is managing partner at Paradigm Pensions