Mark Wadsworth

This is a spare 'blog in case my main 'blog at isn't working

Tax breaks for pensions – who benefits?

From The Daily Mail:

The retirement plans of millions are being crippled by pension charges which wipe off up to 40 per cent of the fund’s value, a report warns today.

It sounds the alarm about one of the biggest and most lucrative parts of Britain’s pensions industry – the individual personal pension. Around £230billion of savers’ money is invested in this type of pension, popular with the self-employed and workers who do not have a company pension.

The campaign group Consumer Focus attacks the ‘excessively high costs and charges’ which must be paid by savers to pension firms and financial advisers. Its 60-page report, published today, says there is ‘a baffling array of terms’ for all the pension charges which an ordinary saver has little chance of understanding.

Consumer Focus reserves particular criticism for one of the most controversial charges, known as ‘trail commission’. This is a charge, typically 0.5 per cent of the total pension fund, paid every year by savers to an independent financial adviser until they retire. The adviser may [sic] not do anything after the first year but will receive commission for decades…

We see this all the time, it’s called ‘tax arbitrage’.

If a particular way of investing in something receives favourable up-front tax treatment (i.e. buying shares via a pension fund rather than buying them directly), then the net return to the ‘pensions saver’ will always be driven down to the same level as if he were a ‘direct investor’. What the ‘pensions saver’ gains in tax relief/deferral, he loses in fees and charges (and inflexibility).

The whole notion of ‘encouraging people to save by taxing them at higher rates’ is an exercise in futility. Would people rather not just pay less in tax on their earnings in the first place and make their own decision on whether to spend or save? Those who would have saved will do so anyway*; those who wouldn’t have saved end up slightly better off; and the notion that we have to hurl a £44 billion wall of taxpayers’ or pensions savers’ money at this every year in order to encourage a small percentage of waverers strikes me, as an outside observer, as completely insane.

There are plenty of other examples, in fact, it’s difficult to think of anything to which this does not apply, the same applies to subsidies – they don’t make things cheaper either, they make them more expensive etc.
UPDATE, I just spotted this at CityWire:

The Social Market Foundation is recommending a radical rethink of government policy to get those who don’t save interested in putting money away… The report, Saving on a Shoestring, looks at why some people find it hard to save, based on a new analysis of the government Wealth and Assets Survey and the Child Trust Fund administrative data. It found that turning people into habitual savers only works for the proportion of people who are inclined to save anyway…

Well, duh.


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