Even simplification will still leave pensions as an essentially tax-relief-driven form of saving. The original intention of tax incentives on pensions was,of course, to save the state the cost of caring for impoverished old folk.
The first Thatcherite Chancellor, Geoffrey Howe, stated that his aim was to produce fiscal neutrality between various forms of investment. But today, look at the tax treatment of various forms of protection policies.
Take, for example, an employee earning £30,000 as a civil engineering supervisor in the construction industry, doing around 40,000 miles a year visiting construction sites on the employer's business.
His employer will pay for a Mickey Mouse “non-contributory” group personal pension, pay £100 into it and be allowed 100 per cent tax relief as a deduction against profits on the premium.
This is regardless of the fact (not the employer's fault, of course) that the fund that the £100 produces will simply be means-tested away at retirement by the minimum income guarantee.
This is deferred salary, according to the Inland Revenue, and the employee's tax is unaffected.
Furthermore, only if he was particularly ineptly advised would he end up having to purchase an annuity at retirement. With a little more finesse and good advice, he could avoid tax entirely on the proceeds.
The same employer runs no accident, sickness and long-term disability scheme so I arrange one for my client. For about £30 a month, a policy will give cover of 50 per cent of salary to retirement. If I persuaded the employer to fork out for this or got him to operate salary sacrifice, my client would get taxed and pay Class 1a National Insurance on the benefit in kind. The employer would, of course, pay Class 1 NI on the benefit in kind.
If the employer set up a group scheme, hey presto, no benefit in kind.
What's that all about then? Also, unless someone knows something I do not, PAYE tax on any PHI claims is pretty well unavoidable.
Which policy is best for society at large? Which should be facilitated by tax incentives? The pension or the PHI?
Greg Thomas Taxworth, Worcester