UKH

An innocuous looking article today that has massive implications

https://www.theguardian.com/business/2019/oct/10/pensions-tax-relief-set-to...

A £40 billion bill where HMRC apparently have no proper control of costs or evidence on value for money, and current higher rate taxpayers yet again being the biggest winners. The clear link is also made to intergenerational unfairness as the young are not contributing as much now, so don't gain much benefit from such reliefs  (and will most likely have less access to such generous schemes when they get older).

Problem is that pensions are taxed as income when they are paid out.  So a higher tax rate payer, without relief, is effectively being taxed twice if their pension contributions are taken from net (post 40% tax) income and then they pay income  tax again when they take their pension resulting in an effective 60% tax rate. Unless you provide relief a higher rate taxpayer is  better off not paying into a pension which kind of negates the reason that workplace pensions were set up, to incentivise people to pay into pensions.

So it's not as obvious as the guardian article suggests.

The answer is to stop pension income being taxed, not to lose the relief.

I thought it was much more complicated than that... irrespective it's highly concerning that HMRC don't appear to have a proper grasp of what's going on on such a huge amount of expenditure.

Some of the previous reports looked at concerns around lifetime allowances (especially the impact on NHS consultants which hit the news).

https://researchbriefings.parliament.uk/ResearchBriefing/Summary/CBP-7505

https://researchbriefings.parliament.uk/ResearchBriefing/Summary/SN05901

One of the biggest problems facing the UK is unfunded pensions and old age care for current and future pensioners. I think it's probably necessary to take the tax hit now. If auto enrolment contributions are increased, surely HMRC realise that pension contributions will increase?

I was surprised that they said 10.4m are saving in work place schemes. If most people are auto enrolled, and 30m+ people are working, why is the figure so low?

Some already have pensions. 

Some are self employed. 

Some earn less than £10k pa. 

I assumed these would be included in the figure, since it was the impact on the HMRC, but I didn't look beyond the figure quoted in the article.

Yes, but presumably less than 20m

Surely getting rid of the tax relief would be pulling up the ladder (again) and that would be more blatant inter-generational unfairness. For other examples see removing access to social housing, removing mortgage interest relief, putting up the pension age, charging tuition fees.

I think it's only those who pay tax at the higher rate while working, but will only pay tax on their pension at the standard rate while retired, who gain from this. (That includes me, by the way, and, I accept, quite a lot of others earning just within the higher tax bracket). Tax relief on pension contributions otherwise is entirely fair, otherwise you would be taxed twice. 

Martin

Some don't want or can't afford to take the 5% hit 

I don't see the problems here.  Pension contributions are limited to £1m(ish) total, which provides an retirement income of around £30000, which seems socially desirable.  I also don't see the consultant issue - why can't they just not contribute once they hit this limit?

I am often surprised by how few business owners  I know use this and prefer ploughing money back into their business ( a good thing ) 

Reality is I suspect  it’s salaried employers who maximise tax advantage on this  useful tax break. Otherwise people would not save money into their pensions.And that is not good. 

You cannot have it both ways so to speak. 

And the pension funds are then used to invest in the uk economy. So that is a win win for everyone. 

I do hpoe that the managers running my pension pots are not investing in the UK economy (OK, maybe a small portion): I hope they've got a better international spread than just the UK.

I've always thought everyone should be taxed on their income from whatever source (above an exempted minimum). This seems to be one way of ameliorating the  intergenerational unfairness mentioned in the OP ("as the young are not contributing as much now, so don't gain much benefit from such reliefs  (and will most likely have less access to such generous schemes when they get older"). Incidentally I'm a tax paying pensioner.

What’s wrong with inter generational unfairness?

Why do the young automatically deserve what the old have worked for? 

Same with the housing market. People look at older people in big houses that hey can’t afford themselves but don’t see the years of work that have gone before. 

The problem is the young may not get as much pension (later too) for the same number of years worked and may miss out on some of the benefits their predecessors had when they were young.

Edit: there is also the likelihood the state may not be able to afford some of the benefits that older people have at present eg free public transport, TV licence.

Why is that a problem? When I started work in the 80s I was paying 30% tax on basic income. I could claim that’s not fair either. 

By trying to make things ‘fair’ for some people, you make it ‘unfair’ for others. That’s the great paradox of life and taxation. 

Pension mangers pay themselves fat salaries from fees depleting contributors' funds whilst gambling and losing on the stock market more like.

My pension is today worth 3 times what I and the tax rebate put in. How did that happen then?

 >By trying to make things ‘fair’ for some people, you make it ‘unfair’ for others. That’s the great paradox of life and taxation. <

Can be true. But that doesn't mean we should not attempt to make things fairER. After all we attempt this all the time eg higher earners pay more tax. I think our society is probably fairer than in the Victorian era for instance where there was less redistribution of wealth.

The impact on professional classes has been huge if you are not from a rich family. As someone from a working class background I left University with about 10k savings (about £30k in current terms with inflation) having had a grant, no fees and a good holiday job. As a young academic starting off I could then afford to buy a house whose value when the mortgage was paid had increased significantly ahead of inflation. I've had an enjoyable career and will retire soon on a final salary pension worth just over half my current pay and get a state pension from age 67.  Those from working class backgrounds a decade older than me could afford to buy posh middle class places... typically worth £400k to £1million now; academic life was a breeze for them and a good proportion left with generous pension enhancements and all got the state pension at 65 (or women at 60). Graduates right now from a similar background and holiday working in good jobs and looking to enter academia have average debts of £50k with slim chances of buying a house for a decade  and a pension currently worth about £200k less according to some recent calculations, the state pension will come at 70. The job is way more stressful than when I started... so much so I simply don't recommend it unless its an absolutely clear 'need'. I see some good academics struggling to cope in their late 40s. My experience and its comparison with the past and the likely future seems common when I talk to other professionals. If you think that is all fair in intergenerational terms you are a moron.

We should aim that basic desires like settle down in a home to raise a family are realistic. That is less realistic now and that is a problem.

It was realistic for oldsters like me because my generation paid less as a proportion of income for rent, we had no student debt, paid lower multiple of income for houses, had greater access to council housing and had more access to private and public sector final salary pension schemes. None of that was particularly earned, oldsters are not uniquely deserving just because we work or have worked for a living like youngsters do now.

You weren’t hit by the three recessions at all? 

Every generation has their problems. 

The interest rates rates in the 80s and 90s were crippling for most people on mortgages. 

Hindsight is a wonderful thing, if you’ve managed to keep your job and keep up mortgage payments. 

We didn’t have brand new cars every 3 years, I to this day have never owned a brand new car. 

I’d suggest even, that because we are living longer, money is being held in property by older people, who maybe 20 years ago would have already died and passed their property down to the next generation. 

Call me a moron if you like, but you are cherry picking anecdotal evidence. 

I certainly don’t have a final salary scheme. 

This lifespan aspect might be significant.

Extreme cherry picking follows.

Hardly. That’s just one of your examples. 

Only 3% of my generation have degrees. 

I referred to we, my generation and oldsters. Not all of my examples apply to me personally but they do apply more to my generation than they do to youngsters.

Hence youngsters as a whole (not necessarily individuals) have the disadvantages I listed.

I think your examples are skewed and kids have it very easy these days. They bellyache how hard it is because they don’t know what hard really is. 

As said by oldsters for millennia, probably since we were in the caves.

Not very relevant to "I certainly don’t have a final salary scheme" being an example of extreme cherry picking after you'd commented on somebody else for cherry picking.

It was another example taken from your cherry picked examples. 

I must admit to finding your OP a bit hypocritical from somebody who is in a final salary scheme and not having to fund their own pension scheme. It’s a bit rich on your part to be a critic when you do not have to worry over these big financial issues

I  do not think the inter generational issue stands upto scrutiny. It’s obvious that as people get older they always put more money into pensions. That has been the case for years. It’s just part of the cycle of life.

I would turn round that argument and say it illustrates how much more wealthy we are as a country co pared with 30/ 40 years ago. Just imagine  everybody would feel if we were still stuck  at the same gdp level from that period. Does not bear thinking about as most of us would be in a desperate position. 

Does not mean that there are still issues to resolve. 

Auto-enrolment ensures that some 80% of eligible workers are putting away 9% of salary every year, starting from the age of 21. That certainly hasn't been the case in the past and it will make a huge difference. Both to the millions assured of a comfortable retirement in due course, half of it paid by their employers by statutory decree, and to the government purse.

If Gordon Brown wants to look back at his greatest legacy, it should not be to his celebrated handling of the GFC, the impact of which he had somewhat exacerbated by accelerating spending in the preceding years. Rather it should be the Pensions Act of 2008.

Hi Offwidth, just for balance, I couldn’t recommend a career in academia too highly. Salary, conditions of work, opportunity to do research that changes lives. Compared to the 14 years I put in in industry before becoming an academic, it’s the best thing going.

100% have the option. 80% have taken it up. Source Pensions Regulator. 

I admire your optimism, and it's not uncommon from those in senior management positions, and I agree that high level scholarship and research will still give a highly satisfying career, IF you can guarantee it. However, there are several elephants in the room.  The usual entry route for a research academic, via a PhD and Postdoc is a big investment in time and money and is facing increasing uncertainty in outcome. Many big name universities are already in massive financial trouble, due partly to the market nonsense of the last decade, and ill fated 'investments; their optimistic managers never mention this in their job adverts.  Brexit impacts, any undergraduate fee reduction, and immigration changes reducing overseas student numbers, might move many institutions into rationalisations and some into closures or mergers. On research, University funding relies on top-up money from other income sources (usually overseas students), as hardly any research is full cost funded; it's quite likely the total research funds available will shink significantly in the next few years and the income sources enabling the cost gap to be made up, could shrink even more; if so, this will leave a good number of current research staff facing forced change. The higher entry debts and comparative salary declines in academia are real, including the less generous and more expensive pension. Something I didn't mention before is the massive increase in bureaucracy and huge growth in costly central administration functions in the last 30 years. There has also been a near doubling of SSRs in the UK sector, some of this through efficiency but mostly through teaching staff working harder. Finally the UK is the only western nation with no effective tenure for the career grade academic.

Alongside the other English language nations, most of Europe now teaches University courses and often researches in English these days...so even if someone wants to be an academic.. what are the real benefits in the near future of remaining in the UK to do that?

The double headed effects of low comparative salary and high workload, much of it frustrating 'paperwork', are real... my office mate left for a Uni in Oz 2 years ago, with a near doubling of his salary for an equivalent job title, better job protection and he says a lot less stress. A good number of the best of my latest BSc graduates in industry are overtaking my salary in the time it takes to do a PhD.

I chose to work in the public sector (as an academic), those who graduated alongside me with a similar background to me who chose differently have generally done much better in financial terms, even if, as in a good proportion of cases, they had to build their own pensions. I struggle to see hypocrisy when I'm saying intergenerational issues are unfair. I think wealth is unfairly concentrating in the rich and that's bad for the futures of our country; within that I think rich pensioners need taxing more and yes that will include me.

Maybe you can find some expert commentators to say these intergenerational problems are not real... all those I've read say that it is and that the impact on social mobility is huge. 

Oh and for Dancing... I've never purchased a new car and normally drive them until they 'die'.

I bought myself out of senior management (and teaching/admin) quite a few years ago, and pay my own salary and my research groups’ salaries through external grant funding. ‘Research is cross subsidised by teaching’ myth doesn’t stack up. I’ve spent too much time with financial directors looking at the real full economic costs of Research behind the published totals. EU funding comes in at 100% FEC plus 25% overheads which gets most FDs rubbing their hands with glee. My VC is very happy with our current arrangement in terms of benefit to the Uni. 

Sorry, but who are these people who buy brand new cars every three years?

What happens if EU funding stops?

Company car drivers, for starters. That’s a lot of cars. But in terms of private ownership, a lot of PCP and lease schemes have three-year durations which means that it becomes opportune, if not necessarily good economics, to flip your car every three years.

Apart from those groups, errr, me.

I am talking about the hypocrisy of objecting to tax relief on pension contributions when you have access to a funded final salary scheme with the USS scheme.

i would take the view that it is essential that the govt encourages pension saving and tax relief like this is an excellent way of doing so. 

And there is little advantage for the wealthy as after £40 k contributions you are taxed heavily anyway. If you earn more than £150k the relief is removed. 

I do not think any of us are not aware over the issues of social mobility. But this is not really one of them 

Of course I can’t speak about your university, but in the one I know best, where I was responsible for this stuff for 7 years (one of the leading Russell Group universities for access to the Eastern Peak) I've no doubt that research is subsidised by overseas student fees (the hours I’ve spent poring over “Transparent approach to costing” spreadsheets I’ll never get back).  Colleagues at other Russell Group universities confirm this to be the case elsewhere, and this situation is understood by the Research Councils.  Actually government and research councils have actively exploited this situation more and more, by demanding explicit “matching contributions”for the biggest grants.

I agree with much of what you say about the strain that’s going to come onto university finances in coming years, but I’m not as sure as you are that research funding is going to be cut.  Both Conservatives and Labour have committed to getting quite big increases in the overall R&D intensity of the economy in the next ten years, and I think there is a realisation even in HM Treasury that this will take more public money.

It seems to me that the biggest cause of intergenerational unfairness is simply that the economy has stagnated for the last ten years.  Real wages have barely increased, and this is directly linked to the fact that GDP per capita, which had been increasing steadily by more than 2% a year for decades, has stagnated since the global financial crisis.  This upends all the expectations people have that each generation is a bit richer than the last - but since political power is concentrated in the old their expectations have largely been met at the expense of the middle aged and young.

Research that attracts grants, yes, that is not subsidised.  But there are plenty of university academics that don't have grants, but still spend a fair fraction of their time doing research and scholarship.  And that is subsidised in the sense that it is paid for by student tuition fees. 

I'm regularly amazed by Offwidth's casual resort to insults like that. No wonder he insists on using a pseudonym, and complains to the mods if anyone mentions his real name. 

It's a very fair point about people of the last generation getting a good set of conditions but I don't think the younger generation are going to be too badly off when you view things over the lifetime.

Fora start all this property wealth gained by the last generation will eventually get inherited by my generation ( I'm 34 now) so although many of my age or younger might have a tougher start in life, by the time we are in our 50's lots of us will be inheriting significant sums gained from the property prices of our parents and grandparents houses. In many cases enough for us to retire on ourselves. 

Admittedly not everyone is going to be so lucky and it may continue the gulf in wealth between those families with property and those without.

But as far as intergenerational wealth goes I'm really not too worried, wealth if looked after can live forever and all that the last generation has gained will eventually fall to us and we'll pass it on to our children too, if our parents are getting richer then ultimately so are we.

Ah, you must be one of these millenials then right? Buying all these new cars and pissing and pissing your money up the wall.

Obligatory /s

You are clear about how much end-of-life care costs, right?  Myself, I'll be impressed if I inherit anything!

The difficulty being that when I get to being that old, the prices - ramped up by what boomers can afford - won't have dropped, and I'll probably be priced out of the care market.

I'm fascinated to know how Offwidth managed to leave university with £10k of savings. I certainly didn't and neither did any of my contemporaries. 

I was also on a full grant, worked during the holidays, except when away climbing, claimed social security when I could, left with no debts but also no money. Doubt if I even 'earned' a total of £10k during that period. 

John

If you're smart you'll pass on the bulk of your assets on while you're still healthy to avoid getting stung in care costs. 

If you are 70 and still relatively healthy sat in a half million pound house you plan on passing on then it's wise to downsize to something more like 150k, or maybe even just rent so if you do need care in the future the council are limited in the amount of assets they can seize to pay for it. Alternatively, if you're sat in significant asserts you can put them to work for you. For example rent your large house out or sell it and by three others and rent them all out, add in a workplace pension and state pension and you'll probably be able to cover most or all of your care costs indefinitely.

the EU funding was just an example, its important to maintain a broad portfolio. 

Its simply not hypocrisy if I think the tax levels were a bit too low for me (and even more so on those 10 to 20 years older than me), and that the next generation of bright kids from working class backgrounds won't benefit as I have. I'm not looking for some major revolution like removing tax relief from pensions but a bit of rebalancing. I do think currently too much money is going to end up as unearned income to the rich and the tax position needs to reverse that a little on the basis of fairness and for the economic benefit of more active money in the economy and less locked up in things like family assets. I'd certainly think it fairer that a bit more is taken in inheritance tax, especially from the largest estates, and that the costs of dementia be capped (currently a brutal lottery for the middle classes that can strip all wealth from some families).

We also need better state pension solutions. Final Salary pensions were pretty clearly shown by the closed Miners scheme to contain much more value than the broken DB valuation methodologies indicated. These valuation methods assume too little growth and too much expenditure (a classic example in my scheme is above inflation pay growth, for ever)  you need a bit of that caution in actuarial estimations but not as much as we currently have: in times of austerity the methodology makes the schemes look unfairly broke and in times of growth, unfairly healthy (encouraging unwise pension holidays). The Telegraph 15 years back were warning of disaster as the government took the Miner scheme on .... in fact for the last decade, even in austerity, the scheme held good value for its pensioners and the government  made hundreds of millions a year from skimming off the growing profits. Collective DC schemes seem a good recent move, while we wait in hope (and probably vain)  for the idiocy of current DB valuation methodologies to moderate. 

It's not a typical example though as most UK HE research funding isn't full costed. The loss of most EU research funds will be a massive blow for UK Universities. We will be trusing Boris or JC to come up with any replacement. 

I've been in really good departments, with top performance on research, teaching and external income for a post 92, that were formally closed with significant redundancies 4 times in my career, due to the effects of the market in HE (declining home student number on expensive engineering courses not properly valued and supported by governments) and 2 additional reorganisations to lose staff (when, after each, the budgetary need was gone a year later and we were recruiting staff again). Universities today are much less fussy about such processes than they were in the 2000s; they simply don't care about career academics losing their jobs if they need to balance their books. Universities are currently as debt laden as they have ever been and might be facing a 'perfect storm' of problems in brexit, immigration change, and fee reduction.

I had only one holiday as a student (a cheap week in the greek islands), no car, and lived carefully. I worked for Plessey as an engineering graduate apprentice in a well paid job every holiday, and for a year and a bit before University. My terms were only 8 weeks long so I was working over a third of a year in my Uni years. I had no debts, had a full grant and my Uni accommodation was cheap. In my day middle class kids who's parents didn't top up their income were the hardest off at Uni.

You are I'm guessing 10 years older than me so given inflation in the 70s the equivalent at your time might be below 5k.

Hi Richard, I was in a big research group in the Uni you cite for around 16 years. With a net contribution to centre of over 30 percent, nobody ever complained about subsidising us. Perhaps we didn't listen closely enough I've pored over the same kinds of spreadsheets, inside and outside the RG bubble. I agree that at institutional level, an averaged analysis shows that research is cross-subsidised. However, on a group by group basis, areas of profitability become obvious but often not a popular analysis to broadcast.

Hi Offwidth, that's only an accurate statement if you believe the veracity of the FEC costing model used across the sector. That would mean that any research council grant at 80 percent of FEC represents a 20 percent loss. If this were really the case, no approval chain would ever sign it off. First, the FEC model is generally a work of fantasy, and secondly dialling in secondary income (QR, industrial etc. etc.) associated with grants more than offsets any shortfall. The last five years, I've led a research institute with no teaching income, returning over 30% to centre just from grants. This is obviously less than the 55% returned by Faculties, but in my annual business planning with finance, when dialling in geared income, its not far off.

I'd be absolutely delighted if University research funding is indeed maintained if we brexit, but as a realist, given there is no 'magic money tree', achieving that is going to be a very hard political choice in the face of much more public facing shortages in the NHS, schools etc; and that's even if brexit effects are not too serious.

Universities have been rather protected, compared to the rest of the public sector, during austerity, by fee income, healthy overseas recruitment and on the research front by doing better than average from the EU. I remain very pessimistic about the next few years.

If we were talking about the middle classes I might agree with you on intergenerational unfairness but my main point relates to its differential impact on social mobility (the bright working class graduates won't benefit like I did, and those via grammar schools did in the generations before me, from a professional career, especially so in academia). I think austerity is only one of several major factors in that, ableit it's all rather interlinked (certainly fees and grants very much relate to austerity).

The lottery on care is a classic example of redistribution that people do not like. Having been through it myself with both parents it sucked money away from my parents assets. But I recognise that in a way that system worked. Parents house sold and used to pay for the costs of care ( which was good). There was little left in the pot to pass on. The assets my parents built up were correctly used to pay for their care and not to pass on.  

Its a brutal form of wealth redistribution but in a way it works. 

And for for those who try and pass on their assets early, it may come as a shock to find its not worth the effort  .

I would have to agree.  I find it hard to see that a priority for use of taxpayers' money is to ensure that comfortably off, middle-class, middle-aged people get large legacies from their parents' will.   (And I say that as someone who could benefit that way.)  Yes, it's a lottery as to whether ones parents need a lot of expensive care, but then it was a lottery whether you were born into a middle-class family that owned such a house or not, and if you were then you were already a winner. 

The tax system should be there to fund a welfare-state, social-security safety net (and large legacies does not fall into that category), and to provide essential services such as schools and hospitals. 

And on the topic of pensions and tax relief:

I've often thought that the better policy would be: no tax relief on pension contributions, but then the resulting pension is not taxed.   (In other words a tax treatment more like an ISA.)

Part of the benefit of that would be a huge simplification of rules.

Maybe you had a diligent PVC-R who tried to shield hardworking researchers from all those tedious discussions ... (or maybe not, if you left before 2009 - but then no one had much idea about the true cost-base of the university, hence its persistent failure to show a surplus in those years).

Well, how about that in the Queen's Speech: "To build on our world-leading excellence in science and deliver solutions to some of the world’s grand challenges we are: Setting out plans in the autumn to significantly boost public R&D funding, providing a framework that gives long-term certainty to the scientific community".

With that and a more liberal visa regime, maybe research universities won't do so badly.  And if Brexit goes wrong, the pound will plummet, making us even more competitive for overseas students.  (Not my desired outcome, to be clear).

I simply don't trust anything Boris says. I think Dominic Cummings thinks it is a very good idea but he has to get Boris elected and not face an economic crash as a result (to afford the investment) and fend off the natural fiscal and social conservatism of his party. Being highly competitive on overseas fees is hardly any use if immigration is still a big political issue. If you whip up immigration linked popularism to win an election it doesn't just go away again in no time.

I was in a meeting with Dominic Cummings, Andrea Leadsom and Chris Skidmore a couple of weeks ago.  DC said, we must double the basic science budget in 5 years, and it was impressive to see the way the two ministers deferred to him ( the teenage Treasury civil servants looked rather more sceptical).  But who knows how long DC will be running the government for.

It works if there are assets to pass on. Given the plummeting home ownership rates I don’t see this working for millennials and future generations.

This.

meanwhile our school is sending begging letters to us as it has so little money.  Our youngest went without A level chemistry lessons for a while because the Only chemistry teacher had some time off, affecting A level and GCSE students.

They cannot as a party be forgiven for their presenting themselves as the safe party to take care of the country.  The school has materially degraded since pre-austerity,unable to keep staff and has really lost the quality of education it offered 7 or 8 years ago.  Criminal Tories

I left January 2009 😁

You must be kidding. Surely you know how much wealth is tied up in houses in the uk.Mostly with the older generation. 

I would suspect it’s would mean  less tax is collected that way . Cheaper to do it this way and then tax the investment gains late via income tax later. 

You seem to have missed my point. I’m taking about the new generation which is a lot less likely to own their homes and therefore unable to use their homes in old age to cover care costs.

Truth is millennials will get shit care and shit pensions, plus they won’t own their homes which means that whatever meagre amount they get will go in rent.
 

Someone is going to own the houses!

Landlords from richer families.

Yep, a few very rich people or heirlooms, who already own many flats and houses and just rent them out. More people will rent and less people will own.