Thursday, 4 March 2010

National Pensions Framework - heading for double taxation?

There are many things to be said about this "framework". This is not a novel model, following roughly the "Chilean" or more recently "Australian" approach. What caught my eye (as a cynical and inveterate critic of politicians) was this bit:
  • There will be matching State and employer contributions. The State contribution will equal 33% tax relief - the delivery mechanism for this to be decided;
  • The same matching State contribution (and delivery mechanism once decided) will apply to existing occupational and personal pension schemes and will replace the current system of tax relief at the standard and higher rates;
There is a cut in the tax relief for higher earners (and and increase for low earners), but that was known already. What is more interesting is the monetisation of the tax credit.

They appear to be moving from a system where you current pay less tax on your income (i.e. you employer diverts you gross income into your pension, rather than send some in tax to the Revenue), to one where you will make you contributions after paying tax on your income and then a direct payment will come from general government revenue as a supplement.

This has no immediate ramifications for what you save. It should be revenue neutral. However, it would appear to me to be a system that is more conducive to change. It will be a much easier task, for example to, reduce the amount of the "credit" or put a cap on it at some monetary ceiling., or even scrap it altogether as an "expenditure cut" rather than as a tax increase.

I reckon this is the sign that tax credits for pensions saving is on the way out. And this is a bad thing.

Why is it a bad thing? Well, from an equity point of view, it means that taxpayers in the future would be subject to double tax. You would be taxed on your income when it is earned. You would then lock it away in an account for 10, 15, 20 years or whatever, and then when you access it in retirement it will be taxed again.

Make no mistake. This is no different from the government subjecting you to income tax on any bank withdrawal you make. It is the same.

How many people would tolerate that? Well, it looks like we're on that slippery slope.

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